[JPL] Apple May Shut Down iTunes To Protest Proposed Royalty Hike

Jazz Promo Services jazzpromo at earthlink.net
Thu Oct 2 11:37:31 EDT 2008

Apple May Shut Down iTunes To Protest Proposed Royalty Hike

Copyright Royalty Board votes Thursday on increase in rates, threatening
iTunes' 99-cent price structure.

by Gil Kaufman

It doesn't seem like that big a jump ‹ 9 cents to 15 cents ‹ but for Apple's
iTunes, a proposed bump up of the royalty rate it pays for each song
purchased from its store has pushed the leading MP3 seller to threaten a
shutdown in protest.

The shuttering of iTunes could come as early as Thursday (October 2), when
the Copyright Royalty Board in Washington, D.C., is scheduled to rule on a
request from the National Music Publishers' Association to increase royalty
rates paid to its members on songs purchased from online music stores like
iTunes, according to Fortune. Seen another way, the 6-cent jump represents a
66 percent hike in the royalty rate, a figure Apple said could force it to
raise its ironclad song price of 99 cents, something the company has
steadfastly refused to do since launching five years ago, despite constant
pressure from major labels to do so.

While nobody from Apple has been discussing the pending decision or its
earlier threat to close up shop, the company has been on the record as
adamantly opposing the rate hike. According to Fortune, in a statement
submitted to the board last year, iTunes Vice President Eddy Cue said Apple
might shutter iTunes rather than raise its prices or absorb the higher
royalty costs.

"If the [iTunes music store] was forced to absorb any increase in the ...
royalty rate, the result would be to significantly increase the likelihood
of the store operating at a financial loss ‹ which is no alternative at
all," Cue wrote. "Apple has repeatedly made it clear that it is in this
business to make money, and most likely would not continue to operate [the
iTunes music store] if it were no longer possible to do so profitably."
Apple's share of the digital music market continues to hover over the 75
percent mark ‹ and is expected to top 85 percent this year ‹ but its profit
margin on iTunes sales is thin, and an executive told Fortune that he had no
doubt an increase in prices per track would result in fewer total purchases
from the store. Apple pays around 70 cents per track to the record
companies, and those companies turn over 9 of those cents to the music
publishers who control the copyrights on those songs.

With record sales continuing their downward spiral ‹ industry blog
Coolfer.com reports that September sales were down more than 20 percent
compared to the same period last year ‹ it's unlikely that the labels would
be willing to turn over a bigger portion of their digital sales to the
copyright holders, either.

CNET speculated on Wednesday that a shutdown was unlikely ‹ especially given
that Apple has sold 160 million iPods and over 5 billion songs to date, and
it would be foolish to leave all those iPod owners with nothing to download.

On Thursday, the three-judge Copyright Royalty Board is slated to update its
1997 decision that covered the sales of physical music products such as CDs
for the past decade. It will be the board's first decision on digital sales
and will set the royalty rates for the next five years, Fortune reported.
While the record companies and the association that represents Apple and
other online music services are seeking a reduction in the royalty rate (or
the elimination of fixed royalty rates altogether), with the digital market
continuing to grow, music publishers aren't likely to back down.

"I think we established a case for an increase in the royalties," David
Israelite, president of the National Music Publishers Association, told
Fortune. "Apple may want to sell songs cheaply to sell iPods. We don't make
a penny on the sale of an iPod." 

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