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.”
