Apple Threatens iTunes SHUTDOWN Over `Royalty Dispute !!!

by **J The Kidd** Thu Nov 27, 2008 1:21 am

Apple has threatened to shut down the iTunes music store if an
obscure three-person board appointed by the Librarian of Congress
increase the royalties paid to publishers and songwriters by six cents
per song.

The Copyright Royalty Board is scheduled to hand down its decision
on these rates by Thursday. As part of their general muscle-flexing of
late, music publishers asked the board to increase the royalties paid
to publishers and songwriters for the sale of digital downloads from 9
cents to 15 cents per song.

Apple -- which has mightily resisted tampering in any way with its 99
cent price point for tracks -- said that if the rate hike goes through
and the labels refuse to absorb the entire resulting increase, the
iTunes music store will become unprofitable.

And, Apple says, it likes making money.

"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," wrote Apple iTunes vice president Eddy Cue in a
statement filed with the board last year, according to Fortune. "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."

Out of each 99 cent song, Apple currently pays artists and labels an
estimated 65 to 70 cents per song, 9 cents of which they currently pass
on to publishers. According to Apple, the 66 percent increase in
publishing royalties to 15 cents per song requested by the National
Association of Music Publishers (NMPA) is too much for the company to
bear.

Of course, Apple could simply tack the extra six cents onto the price
of each song in its store and make up the difference that way. But part
of iTunes' longstanding allure is that every track costs 99 cents (with
the exception of DRM-free tracks in the iTunes Plus previous to October
'07).

Steve Jobs is unlikely to raise the standard track price on iTunes to
$1.05, although that would probably be just fine with the labels, which
have been pressuring Apple to budge on its 99 cents per track policy
for years by allowing Amazon to sell DRM-free albums that they insist
be wrapped in DRM when iTunes sells them, among other things. Despite
this pressure, Jobs has refused to relent, continuing to insist on the
99 cent flat pricing structure. It's hard to believe that Apple would
close iTunes rather than raise prices, but that's exactly what iTunes
vice president Cue threatened to do.

Prospects for the record labels absorbing the entire increase are dim.
They're not trying to do Apple any favors when it comes to keeping the
price of songs at 99 cents, and a 15 cents per song publishing royalty
would gobble over 20 percent of their per-song revenue. Apple will
almost certainly have to pony up some of any additional fees, meaning
that it'll either have to raise prices, run the store at a loss or stop
selling music altogether. According to Cue's statement to the board,
Apple prefers the third option.

Apple and the NMPA had no comment.

The Copyright Royalty Board, pictured above, is set to announce its
ruling on digital publishing royalties for the first time ever by
Thursday. Previously, digital downloads had operated under the same
rate that governed the sale of physical albums. In addition, the board
will set new publishing royalty rates for physical albums and
ringtones. The new rates will be in effect for the next five years. The
previous rate of nine cents per track has been in effect since '96
(updated) -- one reason publishers say it's high time for an increase.

Update: I'm at a conference, but Threat Level posted a follow-up story
about the CRB's decision to leave the publishing royalty rates
unchanged -- much (we assume) to Apple's relief. In addition, the board
set the ringtone publishing royalty at 24 cents, meaning that
songwriters and publishers will earn nearly three times as much for
selling ringtones as by selling full-length songs.