Where TikTok fits in Microsoft's music strategy

Story by Cherie Hu

At this point, no one really knows what’s going to happen to TikTok.

The news is changing by the day:

  • On Friday, July 31, President Trump announced his plans to ban TikTok from the United States via an executive order.
  • On August 1, Reuters reported that ByteDance agreed to divest TikTok’s U.S. operations and sell it to Microsoft, ignoring the executive order.
  • The morning of August 2, the Wall Street Journal reported that those acquisition talks were actually put on hold because the companies wanted more clarity around Trump’s actual stance on TikTok.
  • The evening of August 2, Microsoft countered with an official statement that it did hold talks with ByteDance to acquire TikTok’s U.S. operations, and that it was working with the U.S. government on a deal to be signed within 45 days.
  • On August 3 (yesterday), Trump confirmed that he agreed to let the acquisition talks go ahead — as long as the U.S. treasury received a lot of money in the process (?!).
  • There may be yet another development in this saga by the time you finish reading this article.

Whatever the outcome, chaos is already underway. Upon Trump’s initial warning of the ban, influencers flocked to TikTok to livestream their thoughts and encourage fans to follow their accounts on other social platforms including YouTube, Triller and Instagram. For a brief moment, two TikTok alternatives, Triller and byte, held the #1 and #2 spots respectively on the iOS App Store. (Today, TikTok is back at #1.)

Given that TikTok is a coveted breeding ground for many of today’s music hits, this is evidently a story the music industry should care about. But there’s another angle to this story no one has really mentioned yet: It’s been a long, long time since Microsoft was at the center of any music-industry conversation.

In general, Microsoft is much better known for its B2B and enterprise offerings — think Office, Windows and Azure — than for its consumer-facing apps. With the exception of Xbox, most of Microsoft’s better-known consumer and social businesses were acquired from the outside rather than built from within, and either remain culturally and reputationally separate from the Microsoft umbrella brand (e.g. LinkedIn, GitHub, Mojang Studios, AltspaceVR) or have fizzled out (e.g. Skype is far behind Zoom; Mixer, the Twitch competitor that Microsoft acquired in 2016, shut down 13 days ago).

Unfortunately, music falls into the latter category for Microsoft. The 2000s and early 2010s are littered with several, ultimately failed attempts from Microsoft to launch MP3 players and music streaming and download services to compete with market-leading rivals like Apple, Pandora and Spotify.

Given that music is so central to TikTok’s user experience and success, news of their potential acquisition is a good opportunity to look back at the evolution of Microsoft’s music strategy over the past 20 years. While this history is chaotic, and up to this point ill-fated, it’s also a powerful lens through which to understand the history of music and technology at large — and contributes one piece to the puzzle of why a B2B-focused company like Microsoft might be interested in buying one of the largest, fast-growing social apps in the world.

But first… 

Let’s make one thing clear: Music strategy or no music strategy, Microsoft is doing just fine.

The company’s stock price has gone up more than 4x over the last five years, and nearly 1.5x over the past four months alone. As of publishing this piece, the company’s market value is over $1.6 trillion. Oh, and it’s actually profitable.

Microsoft maintains envious market share in all of its core verticals:

  • Personal computer operating systems — Apple recently admitted that Windows 10 is still four times more popular than the Mac.
  • Office suite software — Microsoft Office commands nearly a 90% share of the market; Google’s G Suite has under a 10% share.
  • Cloud computing — Azure’s 15% share of the market is ahead of Google and second only to Amazon. 

Like any big-tech company with an interest in entertainment, building out a music service would be merely a drop in the financial bucket for Microsoft, and hasn’t been prioritized recently.

But 15 to 20 years ago, dominating music was one of the main activities Microsoft really cared about — and its strategy actually contributed to its own downfall.

Antitrust law broke Microsoft’s early music dominance

One might think that Microsoft’s history with music starts with piracy itself. After all, given that Microsoft owned over 90% of the operating system market in the late 1990s and early 2000s, suffice it to say that the vast majority of music piracy taking place on peer-to-peer file-sharing platforms like Napster, LimeWire, Madster and Kazaa at the time were happening specifically on Windows-powered computers.

But for the most part, Microsoft was not indicted with copyright infringement charges from record labels; instead, those litigation efforts went to the P2P platforms themselves (and, notoriously, to thousands of individual fans). In fact, Microsoft was an early partner to the majors in their anti-piracy crusade. For instance, Pressplay, a short-lived online music store joint-run by Universal Music Group and Sony Music Entertainment, used Windows Digital Rights Management (DRM) technology to protect music files.

The real meat of the story around Microsoft’s early music strategy, and where it all started tumbling, revolves around antitrust law.

History repeats itself, and tech is no exception. As we’re in the middle of antitrust conversations in big-tech today, it’s worth remembering that Microsoft was the target of several antitrust cases in the U.S. and E.U. at the turn of the 21st century. Most of these cases centered on the allegation that Microsoft, which already dominated the P.C. market at the time, was trying to create a vertically-integrated monopoly by making it difficult for P.C. owners to download software that competed with Microsoft’s owned-and-operated suite of apps, which were bundled with the Windows O.S. for free. United States v. Microsoft Corporation, which centered on Microsoft-owned Internet Explorer, is considered a landmark antitrust case in tech history.

Aside from internet browsers, music and media were also at the center of this antitrust debate. By the early 2000s, Microsoft looked like it was going to own a truly vertically-integrated digital music infrastructure, short only of signing artists directly to record deals. Windows Media Player (W.M.P.) was the default music player on all Windows operating systems. In 2000, Microsoft acquired both MongoMusic, a third-party digital music provider, and Pacific Microsonics, the developer of HDCD audio technology. MongoMusic was built into MSN Music, an online hub that also sold licensed music downloads from 2004 to 2006.

In December 2003, RealNetworks — the parent company of music service Rhapsody — filed a $1 billion antitrust lawsuit in the U.S. against Microsoft, alleging that the latter illegally bundled its W.M.P. software too closely with Windows, squeezing out competitors. The two parties settled the lawsuit in October 2005 for $761 million, on terms that would have a drastic impact on Microsoft’s future music business. Namely, as part of the settlement, Microsoft had to start promoting and marketing Rhapsody on its own music platform, MSN Music. The E.U. also charged Microsoft a €500 million fine, and ruled that the company would have to offer Windows to consumers without W.M.P. built in.

Having to promote a major rival like Rhapsody on their own channels and disintermediate digital music delivery in this way dealt a significant blow to Microsoft’s plans for expansion in the music vertical. But it was ultimately positive for market competition — allowing a wider range of companies, including most notably Apple, to vie for the top spot in music fans’ hearts.

Microsoft’s music streaming and download landfill

What followed in the wake of these antitrust cases was a strangely unfocused effort from Microsoft to launch music services left and right, perhaps in a desperate and ultimately failed attempt to thwart rising competition.

Based on my own research, I can count not one, not two, not three, but at least six different music services that Microsoft acquired, launched or powered, and subsequently spun off or shut down, between 2000 and 2018:

Perhaps the most notorious example is Zune, an MP3 player and accompanying music subscription service that Microsoft launched in September 2006 in an attempt to compete with Apple’s iPod, which had already had a five-year head start. Microsoft reportedly invested $100 million in advertising for Zune — and even partnered with Live Nation on dozens of in-person concert activations — to help promote the device’s differentiated features like social networking and wireless file-sharing across multiple devices.

But in spite of all this marketing power, Zune fell terribly short of expectations. From 2007 to 2008, annual revenue from Zune devices plummeted by more than 50%, from $185 million to $85 million. Analyst estimates at the time pegged Microsoft’s share of the portable media player market at only around 5%, whereas Apple’s share was up to 70%. Eventually, TIME deemed Zune one of the “10 Biggest Tech Failures” of the 2000s.

All the Zune services closed down for good in 2015; as the above list suggests, none of Microsoft’s other music services lasted much longer than that.

There are a couple of different reasons to explain the downfall of Zune and other music initiatives at Microsoft.

For one, there’s the pure confusion on the consumer side that results from having so many different music services available under a single brand umbrella, especially given that Microsoft controlled operating systems but not the devices themselves. As media analyst Mark Mulligan writes in his book Awakening, this led to a situation where “a Windows 8 Lenovo laptop is shipped with both Xbox Music and also streaming music service Rara, while a Windows Phone 8 Nokia Lumia contains Xbox Music, the Nokia Music Store and Nokia Mix Radio, as well as often a carrier service.” This was in stark contrast to Apple, which in the time of iTunes and the iPod was vertically integrated in the truest sense, controlling the device, the O.S. and the music software. In Mulligan’s words, Apple was “a compact but highly cohesive nation state,” while Microsoft resembled “rambling federations of competing principalities and kingdoms.”

Then there’s the actual product usability and brand. Mulligan claims in his book that the experience of syncing Microsoft-owned software to hardware was quite clunky for music, and that the company was not as good as Apple at “delivering a seamless service-to-device journey” — something we all take for granted today. By many accounts, the Zune in particular, despite an allegedly differentiated feature set, missed the magic that Apple’s iPod was able to develop around its brand for five years prior. As former Slate columnist Farhad Manjoo wrote back in 2012: "Microsoft’s player is just as good as an iPod — it performed all of that device’s main functions pretty well. But there’s no way in which it’s better than an iPod. And that’s why it was doomed."

Many of Microsoft’s other music services that flopped also had the unfortunate flavor of an also-ran. In fact, when MSN Music shut down its store in 2006, it contracted Pandora, a market-leading competitor at the time, to power the backend of MSN Radio. MixRadio, the service that Microsoft inherited as part of its 2013 acquisition of Nokia, also bore a strong resemblance to Pandora, offering only algorithmically-generated radio mixes based on users’ personal preferences; Microsoft sold MixRadio to Line in 2014.

That said, a select few of Microsoft’s music services were actually pretty interesting in terms of business models, even by 2020 standards. For instance, Urge, a music service Microsoft launched in 2006 in partnership with MTV Networks, had a multimodal business model — encompassing à-la-carte track downloads, lean-back radio stations and multiple tiers of monthly streaming subscriptions, plus extensive editorial content from MTV’s network of bloggers. Compared to today’s strikingly homogenous slate of subscription-based streaming services, this somehow feels like a breath of fresh air. But because there were so many other services competing for attention at Microsoft, perhaps this sprawling diversity was also a liability in terms of a lack of focus.

Last but not least, there’s the team that was running the whole thing. From the beginning, the “music executives” at Microsoft were actually focused on gaming, not on music. In particular, the person appointed to lead the company’s music strategy a year before the Zune launched was Robbie Bach, former Microsoft S.V.P. and head of the Xbox unit.

In hindsight, the writing was on the wall with this kind of arrangement: Music would ultimately be treated as just one, loss-leading part of a wider, more lucrative entertainment suite. This isn’t inherently bad, but does put an inherent ceiling on growth for Microsoft's music ambitions. (The original Zune URL, “zune.net,” now redirects to the Xbox homepage.)

Where is Microsoft’s music and entertainment strategy today?

With its consumer-facing music apps decimated, Microsoft’s music strategy today is focused more on creative tools for artists on the one hand, and B2B services and integrations with third-party streaming providers on the other hand.

For example, Microsoft’s online Music x Tech hub highlights case studies of artists’ creative projects that incorporate the company’s backend machine-learning, computer-vision and sound-design technology. Lauv’s My Blue Thoughts and Björk’s Kórsafn sound installation both used “Microsoft A.I.” to analyze or create music or text. X Ambassadors’ Boom mobile app was developed using Windows’ spatial audio platform, Windows Sonic. The likes of Neon Indian and Washed Out have used Microsoft’s spatial computing SDK, Azure Kinect, to generate live performance visuals in real time.

On the B2B side, Microsoft inked a partnership with Taiwanese music service KKBOX in December 2019, encompassing a migration of KKBOX onto Microsoft Azure as well as the joint development of creative A.I. tools for generating lyrics and music arrangements. Xbox Game Pass also has a deep integration with Spotify (including an old bundle) that the latter company often cites in its earnings reports.

Gaming, not music, remains the focus for Microsoft's consumer entertainment efforts, and it's doing quite well. Revenue from Xbox content services increased 65% year-over-year last quarter — faster than almost any other part of Microsoft’s business. Minecraft, the main game developed by Microsoft-owned Mojang Studios, recently passed 200 million unit sales and 126 million monthly active users

This raises the multimillion-dollar question, and the reason you’re reading this:

Where the heck does TikTok belong in this picture?

Many quick takes over the past few days have focused on consumer data and reputation as the main driving factors behind the acquisition. As analyst Dan Ives told the New York Times, “Microsoft is viewed as your grandpa’s company, and it is trying to change that.”

Based on the lengthy history of Microsoft’s music strategy outlined above, I want to focus on a few other angles behind a TikTok acquisition that are more relevant to the music industry:

Creative video production. As popular vlogger Hank Green aptly pointed out in his latest newsletter: “TikTok is two different apps. It is both a video creation system and a video discovery system.” In other words, it is as much a creative tool as it is a distribution tool, for everyday creators, musicians and brands alike.

Tapping into the power of TikTok as a creative tool rather than just a media channel would align more with Microsoft’s existing music strategy and branding, which seems to focus on empowering artists to do their best work. TikTok’s recent $200 million Creator Fund also ties well into this artist-facing approach.

Cloud gaming and mobile entertainment. Microsoft’s consumer-facing entertainment strategy is increasingly shifting towards mobile devices and the cloud. Next month, Xbox will launch its xCloud gaming service, which will allow players to play over 100 Xbox titles on mobile phones and tablets.

With over two billion downloads to date, TikTok would add to Microsoft's vast slate of games and entertainment by offering a massive distribution channel for cloud-based, user-generated creative content, both livestreamed/synchronous and on-demand/asynchronous. This is a combination that Microsoft was somehow never able to achieve with Mixer, despite a reported $30 million exclusive deal with Ninja and multiple integration efforts such as a dedicated Mixer app for the Xbox One console.

More importantly, TikTok can also become a Microsoft customer for cloud services. As The Information recently reported, TikTok committed to buying over $800 million of cloud services from Google between May 2019 and May 2022, switching away from Amazon Web Services. Switching that business yet again to Microsoft Azure, which generated over $13 billion in revenue last quarter, would be a major boon for the latter company.

Community-oriented social media. Microsoft has a strange, double-sided history with social media. On the one hand, the company tried and failed to launch a few consumer-facing social apps from the inside, like the short-lived So.cl. But on the other hand, many social and social-adjacent networks that Microsoft acquired, including LinkedIn and GitHub, continue to thrive with relatively minimal integration into Microsoft’s overall brand. While video-conferencing product Microsoft Teams still trails behind Zoom in popularity, it still surpasses Slack in daily active users and has thrived amidst a wider transition to remote work.

To date, Microsoft’s social strategy has focused not so much on connecting individual people, but rather on tapping into and facilitating specific, niche communities — LinkedIn and Yammer for professional communities, GitHub for coding communities, Mojang for gaming communities, AltspaceVR for any groups hosting virtual events — while staying operationally hands-off.

While it might not seem like it on the surface, TikTok actually aligns well with this idea. Because TikTok's distribution and discovery algorithms focus on content quality rather than on follower counts, the ecosystem is organized around several, more niche communities of creators (including, yes, gamers), each with their own behaviors. And the shared demographics among these communities — namely 13- to 24-year-olds, who comprise nearly 70% of TikTok's user base — would be a truly new frontier for Microsoft's otherwise buttoned-up, business-facing ethos.

The key with developing communities, though, is fostering trust through genuine immersion. As Hank Green put it, humorously and seriously:

Satya Nadella needs to find out what kind of TikTok he is on. Is he on straight TikTok? Cottagecore? Beans? If someone asks him what his favorite TikTok is and he gives some dodgy bullshit like ‘I think Charli is such a creative dancer’ get ready for the fucking pitchforks.

To play the community game, you really have to build both quality and trust over time. And if Microsoft's music history is any indication, winning that trust with music consumers and rights holders will be a massive uphill battle with which they will need a lot of outside help.   🌊

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