Microsoft strikes royalty deal for its rival to iPod

The world's biggest record labels are to be paid a royalty on sales of Microsoft's new portable music player, the Zune.

The technology giant has signed a licensing deal with Universal Music and is in talks with the other major record companies that could lead to similar deals. It believes that by offering a cut of sales, it can neutralise concerns over what the industry terms music "piracy" in an era of file sharing.

The Zune - which Microsoft hopes will be the first serious rival to Apple's ubiquitous iPod - is a wireless device that allows owners to share songs and videos with nearby users.

Chris Stephenson, general manager of global marketing for Microsoft Entertainment, said that a royalty-based licensing deal should provide it with more freedom to allow song-sharing or other promotions.

Universal will keep part of the royalties for its own corporate profits, while the remainder will be passed on to its roster of artists, which includes Eminem and U2. The exact financial details were not disclosed, although Universal is expected to receive more than $1 for each $250 device sold.

The ground-breaking deal with Microsoft will become a template for the industry, according to Doug Morris, chief executive of Universal Music, a division of the French media conglomerate Vivendi.

"I don't want any business built on our music without getting paid a part of the business," he said. "There's a great deal of music that's stored on these devices that was never legitimately obtained, and we wanted to get some sort of compensation for what we thought we're losing. I want our artists to be paid for the music that makes these devices popular."

Universal's deal to supply songs to Apple's iTunes music store expires next year, and the company is expected to try to demand a similar cut of iPod sales.

The pre-launch agreement between Universal and Microsoft stands in contrast to the chippy relationship between the music industry and Apple's chairman Steve Jobs. Mr Jobs has exploited the dominance of iTunes - which accounts for about three-quarters of all paid-for music downloads - to demand low and inflexible prices for songs. The music industry has been searching for alternative ways to increase its revenues from downloads, and has long been keen to back a rival to the iPod.

The Zune will go on sale in the US next Tuesday in time for the Christmas sales rush. Like the Apple's integrated iPod and iTunes system, the Zune will link to an online music and video store where users can buy single tracks or pay for an "all-you-can-eat" subscription. Microsoft, though, hopes that additional features - including an FM radio and the prospect of future software updates - will mark it out from the all-conquering Apple product.