In a deal that underscores the old maxim “hindsight is always 20/20,” Universal Music Group was able to extract a royalty on the sale of each Zune player Microsoft sells as part of its compensation for licensing its recordings for the software giant’s new digital music service, according to a source close to the talks.

If only Universal Music and the other major labels could arrange a do-over on the Apple iTunes deal that was made well before anyone had a clue as to portable music’s market potential.

Just in its last quarter, Apple sold 9 million iPods, and music products accounted for 42 percent of Apple’s $4.84 billion in revenue in the quarter.

This while Apple’s iTunes catalog is barely breaking even, and it is from the iTunes catalog that the music industry gets its small sip from the Apple gravy train.

Cool Duet

Under the terms of the Microsoft deal, Universal Music, the largest music conglomerate in the world, will get a cut of both Microsoft’s hardware sales and its download revenue. Microsoft shares rose $0.29 to $29.27 in recent trading.

The extra revenue buys Microsoft grassroots support from a very influential community.

“Microsoft is banking a lot of its strategy for the success of Zune on industry support for particularly artists’ support for the Zune player,” said Michael Goodman, program manager, digital entertainment, for the Yankee Group. “They have given Universal’s artists a financial incentive to support Zune. The artists are getting paid fifty cents of the dollar that Universal is getting.”

The music industry, which is dominated by four large players that compete fiercely for talent, tends to make coordinated moves in the digital music market, so similar announcements between Microsoft and Sony BMG, EMI, and Warner Music Group are expected.

The music industry has complained long and hard that it has not been duly compensated for its content that is the engine driving the success of the iPod. Revenue from digital music sales have failed to keep up with losses suffered by the music labels from declines in physical CD sales.

Digital music sales recently reached 10 percent of overall revenue for Warner Music, a bellwether of the music industry. Digital revenue, as a percentage of overall revenue, is still locked in the single digits for most of the other labels (see WMG Digital Music Sales Spike).

One Price Fits All

Microsoft is expected to introduce its 30-gigbait Zune on Tuesday at a retail price of $249, with songs available from the Zune catalog at $0.99 each, a price set in the labels’ initial negotiations with Apple.

The labels have attempted to get Apple to agree to a variable price-per-download policy, but Apple has refused. Negotiations between Apple and the music companies over variable pricing boiled over into a public spitting match last year (see Apple Holds Labels to $0.99).

Apple CEO Steve Jobs called music industry executives greedy for demanding more money for more popular songs. The industry hit back, saying that in Apple’s view their content was just a promotional vehicle to push iPod sales, and they received nothing from the success of the iPod (see Bronfman Fires Back at Apple)

Bruises from the dust-up can still be seen occasionally, but for the most part the two sides seem to have buried the hatchet, publicly at least.

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