This post was published 1 year 1 month 20 days ago.
It\'s is possible that the information within this article is now out of date or updated.

Yet another game of high level brinkmanship is going on involving the fate of digital music…and of course Apple and it’s iTunes store are right in the middle of it

The Copyright Royalty Board is expected to decide on Thursday if they wish to approve a proposal from the National Music Publishers’ Association to hike royalty rates paid to music publishers on songs bought online from such venues as iTunes. The proposal is to raise the cut for the publishers from 9 cents to 15 cents a track – a whopping 66% hike. Though this seems like nickels and dimes, it will surely cause everyone down the line to hike THEIR rates to try to ensure that the actual cost increase lands at the feet of the consumer…and Apple is not amused with this, as it has staked an awful lot on its 99 cents a song deal.  So not amused in fact that they are threatening to take down iTunes over it.

iTunes vice president Eddy Cue wrote the following in an official statement from Apple.

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. 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.

No longer operate the iTunes store? Tough talk from Cupertino since Piper Jaffray estimates that Apple will sell 2.4 billion songs this year, giving it an 85% share of the digital music market. For those of you that failed math at Music School, 2.4 billion songs at 99 cents a song is well over 2 billion dollars this year. Even the Recording Industry Association of America (RIAA…BOO…BOOOOOO) admits sales of digital songs and albums rose 46% last year, to $1.2 billion.

So would Apple really be willing to kill it’s musical golden goose? Well, they don’t get too much of that 2 billion. Of that 99 cents a song, Apple pays about 70 cents to the record companies responsible for each track so they get about 20 cents per song, but when you are selling 2.4 billion of them, that is still a lot of yeah yeah yeahs. Out of their 70 cents, the record companies then pay the publishers their nine cents. If that nine cents becomes fifteen, then there is no doubt the record companies will then try to charge Apple (and others) 76 cents out of every 99. This would force Apple to cut what they consider a razor thin margin even thinner (unlikely), hike the price to the consumer to a buck and five cents (more unlikely) or just take their iPod and go home.

Personally I think this is Apple playing chicken with the record companies. Apple has depended on iTunes for a long time as a key tool for selling iPods and preserving market dominance in an increasingly crowded field…and the App Store makes it even more essential to their long term plans. iTunes really isn’t there to make money on music sales, it is there to provide a strong internet backend for iPods, iPhones and the Apple “lifestyle”. For that reason, the record companies both hate and love iTunes (it moves an awful lot of product and creates a lot of buzz, but they don’t make a cent on iPod or iPhone sales despite repeated attempts to get a piece of that pie). However, I have no doubt the thought of Apple shutting it down is filling them with dread, as suddenly they would have to put in a lot more work (and risk) to sell music online, maybe even depending on their own websites….which will lead to utter chaos. The only other device/store combo worth noting, Zune, is not even close to the market position that iPod/iTunes is and I would be surprised if Redmond would even make an effort to fill the void iTunes would leave (seeing as how they would be doomed to fail). Instead, smaller third party sites, label sites and artist websites would have to pick up the slack…which they couldn’t do.

The way I see it, an inability to find a way to download songs cheaply and legally, means that even more will be downloaded cheaply and ILLEGALLY. In short, the RIAA, the record companies AND the publishers need iTunes to at least make a token effort to stem the raging torrent of pirate downloads…and Apple knows that. They would not risk making that threat about closing iTunes (which I have to assume is a big fat bluff) otherwise.

I would expect the record companies to blink in this little game of brinkmanship, boosting the cut for the publishers without trying to hike the fee they demand from Apple and other online merchants. Of course, they will look to other areas to make up for the loss…higher CD prices anyone?

(Sources – CNN)

Zealot (469 Posts) - Website | Twitter | Facebook

By day a department manager and writer for a major network device vendor...by night Zealot stalks the mean magnetic streets, striking fear into the hearts of bandwidth abusers and theme park mascots. Zealot has been involved with mobile devices for more than a decade now, starting off with dumb phones, moving to PDAs and then to smartphones, notebooks and netbooks with the odd PMP thrown in. Most of his mobile time currently is spent on a Treo Pro, Zune HD, Thinkpad T61, Gigabyte M912M or a Hackintoshed Compaq Mini 704. He proudly groks the Geek community and considers himself a Neo Maxi Zune Dweebie (thanks Will Wheaton!).