Goodbye royalty, hello equity: there's nothing "advisory" about this capital.

This deal between YouTube and 4 of the major content owners is really, really interesting.

What we are seeing here is the worm turning - the content owners are grabbing a slice of the new media networks.

When Doug Morris calls YouTube a copyright infringer and then signs an equity deal with those self same infringers, you are seeing the owner of the unique resource firing a warning shot and then strongly asserting their rights to a big upside in the success their content helps create.

Why would YouTube/Google give up serious equity to some guy with no rights, and not give any to advisory capitalists? Simple: the content owners actually bring something unique to the party, something YouTube really cannot live without. Take it away and you have the burnt out shells that are Kazaa, Napster etc. Take away advisory capitalists and you might have a business model worth a bean....

Dear Umair, please pay me a royalty.

Why would Microsoft pay per unit Zune royalties to Universal Music?

For the same reasons that 70c of every dollar spent at ITunes goes to the record company - they own the unique resource, and if you want to use those resources (legally), you have to pay the monopoly rent they demand.

Keen students will note that the margin for ITunes is a mere 30c per download; projecting that competition, primarily based on end-user price, will arrive from Napster, Zune etc. who are the only parties in this collaboration likely to be long term winners?

That's right: those pesky copyright holders, the record companies.

Margins for the reseller will be eroded over time, as the dumbest player on the block tries to capture share by dumping their margin. Do you think it is likely the record companies will drop their prices? Not at all; in fact, they are already trying the opposite.

If you analyse this carefully, the real money for MSFT in digital music is in the sale of the device, not the music.

Without a device to drive real profits to them, resellers like Napster are going to get squeezed, just like Intel squeezed their entire value chain more than 10 years ago with Intel Inside. They will be squeezed by end user price cuts and squeezed by supply side input price hikes. Napster have been good enough to mention these risks in their most recent 10K SEC filing:

"We rely on content provided by third parties, which may not be available to us on commercially reasonable terms or at all. "

"If we lower our prices [to compete with lower priced competition], our gross margins and operating results will be adversely affected. If we do not lower our prices, we may be unable to compete with discount services."

Ouch.

MSFT may just have hit on a smart way to avoid at least one end of that squeeze.