Microsoft plans to pay Universal Music a percentage of its revenue from sales of its new portable media player, the Zune, the New York Times reported yesterday.

Microsoft is trying to position the Zune as an iPod killer and plans to offer a digital music sales service along the lines of iTunes. However, Universal Music Group, which releases recordings by hundreds of popular artists including U2 and Jay-Z, played hardball in its negotiations for licensing the music to Microsoft.

Universal had Microsoft over a barrel. Microsoft's music download service has to be able to compete with iTunes or no one will buy a Zune. Music fans are unlikely to buy a Zune or shop at a Microsoft online music store, if they can't download a full range of music.

With the Zune's release date rapidly approaching, it's no wonder Microsoft felt they had to give in to Universal's demands.

But were the demands legitimate? The music industry argues that portable media players are conduits for music theft. They point to a study that estimates Apple has sold only an average of 20 songs per iPod, insinuating that the remainder of an iPod's capacity is filled with songs illegally ripped from friends' CDs or downloaded from an online file-trading network. The music industry insists it is doing poorly strictly because the iPod has not made up in music download revenues for what it has destroyed in sales of music on compact disc.

Om Malik, however, thinks the music industry needs to take some of the responsibility for its own impending demise. He wrote on his blog, GigaOM:

If Apple had to pay at least $1 per device for every iPod sold over past two fiscal years, its cost would be $62 million at minimum: or about one more song per device. If the music industry cannot sell one additional song to consumers (and has to blackmail for more money) then, you as a business, have lost grip over your core competency.

Is Universal Music Group entitled to a share of the profits from sales of a product that they had no hand in designing or developing? Has Microsoft come up with a new business model that fairly compensates the suffering music industry for the losses they've experienced due to evolving technology?

Is Universal Music Group just fighting for what they deserve? Or is it Blackmail?