Apple threatens to shutter iTunes over proposed royalty hikes

[AppleInsider]

Apple has threatened to close down its iTunes Store should regulators approve a royalty hike that would grant artists a 66 percent increase in commission for each song sold through online download services.

According to Fortune, the Copyright Royalty Board (CRB) in Washington, D.C. is expected to rule Thursday on a proposal from the National Music Publishers' Association to raise the rates paid to its members on songs purchased from digital services like iTunes from 9 cents to 15 cents a track.

The three-judge panel oversees statutory licenses granted under federal copyright law, which includes music sales, according to the report. The board's previous ruling covering physical CD sales was made in 1997 and expired last year, making the impending decision the first to affect digital music sales. It will reportedly span the next five years.

In a statement submitted to the CRB last year regarding the matter, Apple iTunes chief Eddy Cue suggested that company might decide to shutter iTunes rather than raise prices above 99 cents or eat the cost of the fee hikes.

"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, which has leveraged the iTunes Store to help sell over 160 million iPods, typically collects 99 cents each time a customer downloads a song, of which 70 cents is turned over to the record labels. The record labels, in turn, then typically pay 9.1 cents to the music artists who own the copyrights to the songs. Most of Apple's remaining 29 cents is used for maintenance rather than profit.

Like Apple, Fortune reports that the record labels "are in no mood to pay the proposed royalty increase" out of their own pockets; CD sales have dropped by 20 percent in the past year and so put pressure on labels to recover this through downloads. Online sales surged 46 percent over the same period and have been poised to overtake physical albums as iTunes has pushed past Wal-Mart to become the US' largest individual music retailer.

They've instead asked CRB to do away with fixed royalties in favor of an 8 percent commission to artists, which would translate to about 5.6 cents on the wholesale cost of each 99 cent track. The Digital Media Association, which represents Apple and other digital retailers, is seeking an even lower rate of 6 percent, or 4.8 cents per track, according to the report.

Musicians charge that these attempts by Apple and the DMA to hold or even reduce ultimate royalty rates are effectively taking unfair advantage of their positions to push electronics. By keeping iTunes music below the dollar mark, Apple knows it can use its online store as an incentive to device buyers, according to NMPA president David Israelite.

"Apple may want to sell songs cheaply to sell iPods," he notes, "[but] we don't make a penny on the sale of an iPod."

[ View this article at AppleInsider.com ]

[wilco]

Originally Posted by AppleInsider

Apple has threatened to close down its iTunes Store should regulators approve a royalty hike that would grant artists a 66 percent increase in commission for each song sold through online download services...

Knee-jerk reactions in 3....2....1....

[mstone]

Originally Posted by AppleInsider

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."

Right! With millions of new iPhones out there, not likely. Sounds like so much posturing. The cost will just get buried in there somewhere if there is a price hike.

[Buck]

Originally Posted by wilco

Knee-jerk reactions in 3....2....1....

I missed you, wilco.

[JeffDM]

Exactly how many different royalties is Apple directly paying to sell a track?

[cprail]

BS... the iTunes store is the core of Apple's commercial strategy.

[anantksundaram]

Apple's obsession with 99¢, as opposed to, say $1.05, is silly.

Heck, make it $1.09, blame in on the government, and make an extra 4¢ per tune, Apple! I need some sops as a shareholder right about now.....

[HyteProsector]

I find all of this to be rather hilarious. In an age were record companies are becoming less and less relevant, they ask for more. Haha. They're like squirrels hoarding nuts for the winter. I'm not saying that record companies are going away, just that their whole business model is getting rearranged. (Look at Radiohead, NIN, Moby and the momentum of Myspace) I would like to see Apple play hardball with these losers. Maybe cancel iTMS, and release iTunes 8.1 with increased compatibility with Limewire. And then throw a marketing campeign behind it for good measure. I'm not saying Apple will do this or even that they should. I would just like to see the impact it has on record sales.

[wprowe]

How about Apple bypassing the record labels, working directly with artists, and paying that 70 cents directly to the artist? That's a 30/70 split on the 99 cents. It seems that the artist is always the loser in these deals. Today they make 9 cents. Record labels want to lower it to 6 cents. Apple wants to lower it even more. That is appalling. A 30/70 split between Apple and the artist is a much better solution, and as good a deal as we photographers get with stock photo houses like Acclaim, Alamy, etc.

[Hands Sandon]

Why can't they all be more flexible.
Sales below 1,000 songs get 15%
Sales below 100,000 songs get 10%
Sales below 1,000,000 songs get 5%
Have some kind of a scale at least so everyone benefits.Can't they all just grow up!

[solipsism]

Originally Posted by cprail

BS... the iTunes store is the core of Apple's commercial strategy.

The iTunes Store started well after iTunes and the iPod had become popular and the iPod/iTunes model seems entrenched enough to not need to operate it's own store to be successful in selling Macs, iPods and iPhones.

But if they did stop their own music store, that doesn't mean that there wouldn't be any music store within iTunes. Apple could get with Amazon, eMusic, et al. to offer a music store portal within the iTunes application. This would instantly and dramatically increase the popularity of any music store portal that Apple could easily ask for their own per track royalties, This wouldn't have to be much as their iTS server and bandwidth costs for music would now be nil. To keep the confusion down, since they would still be offering movies and TV Shows, they could offer separate store listings in the left-hand column of iTunes.

(Note: I don't think Apple will forego their music store)

[anantksundaram]

Originally Posted by wprowe

How about Apple bypassing the record labels, working directly with artists, and paying that 70 cents directly to the artist? That's a 30/70 split on the 99 cents. It seems that the artist is always the loser in these deals. Today they make 9 cents. Record labels want to lower it to 6 cents. Apple wants to lower it even more. That is appalling. A 30/70 split between Apple and the artist is a much better solution, and as good a deal as we photographers get with stock photo houses like Acclaim, Alamy, etc.

I am confused: The article talks about "National Music Publishers' Association" wanting "to raise the rates paid to its members on songs...."

Where do the record companies come into this? Aren't we talking about the artists?

[Ahruman]

Originally Posted by HyteProsector

I find all of this to be rather hilarious. In an age were record companies are becoming less and less relevant, they ask for more. Haha. They're like squirrels hoarding nuts for the winter.

*sigh* No, the songwriters are asking for more, and a panel of judges is expected to rule in favour. The record companies are asking to pay them less –*5.6 cents vs. 9.1 cents, or a 40% cut.

Originally Posted by wprowe

How about Apple bypassing the record labels, working directly with artists, and paying that 70 cents directly to the artist?

Artists with record deals are contractually bound to let the record company manage digital sales. Very few artists have the clout to negotiate away that clause.

Small independent artists without major-label record deals would probably be interested, but Apple doesn’t seem to be; individual negotiations are probably seen as more trouble than they’re worth.

[Kasper]

Originally Posted by anantksundaram

I am confused: The article talks about "National Music Publishers' Association" wanting "to raise the rates paid to its members on songs...."

Where do the record companies come into this? Aren't we talking about the artists?

The artists are the members of the NMPA...

Best,

K

[Mr Underhill]

Originally Posted by wprowe

How about Apple bypassing the record labels, working directly with artists, and paying that 70 cents directly to the artist? That's a 30/70 split on the 99 cents. It seems that the artist is always the loser in these deals. Today they make 9 cents. Record labels want to lower it to 6 cents. Apple wants to lower it even more. That is appalling. A 30/70 split between Apple and the artist is a much better solution, and as good a deal as we photographers get with stock photo houses like Acclaim, Alamy, etc.

The artist would need to bypass the record label first and whilst not impossible these days, is pretty unfeasable considering the music industry is notorious for shafting starstruck artists left right and centre.

[bloggerblog]

Originally Posted by AppleInsider

Apple...collects 99 cents each time a customer downloads a song, of which 70 cents is turned over to the record labels. The record labels, in turn, then typically pay 9.1 cents to the music artists...

Like Apple, Fortune reports that the record labels "are in no mood to pay the proposed royalty increase" out of their own pockets.

So Apple gets 29 cents to host albums and take care of transactions and run the iTunes store, sounds fair.

Record companies collect 70 cents for... uhmm... errr... i dunno... but pays artists for producing the music 9.1 cents per sale!!! Sounds like a total rip off to me, artists should cut the middle man, follow in the footsteps of Prince. But I think artists are trapped in a contract and think they have too much to lose if they complain.

[neondiet]

Originally Posted by HyteProsector

I find all of this to be rather hilarious. In an age were record companies are becoming less and less relevant, they ask for more. Haha. They're like squirrels hoarding nuts for the winter.

You need to read that article again: it's the National Music Publishers' Association who are asking for the increase, not the Record Labels. Frankly I don't see how Apple are even involved in this. If it's the Record Label's responsibility to pay the artists, then surely that's a contract between them. Why should Apple get dragged into it?

Whatever happens, Apple can't afford to close iTMS. It's now an institution, and is the grease on the wheels of the iPod & iPhone sales. They'd never regain the same status if iTMS went away. And turning it off will be commercial suicide for their iPod & iPhone business.

What's the betting that MicroSoft would make Zune hay if Apple dropped the ball now.

[federmoose]

Originally Posted by anantksundaram

I am confused: The article talks about "National Music Publishers' Association" wanting "to raise the rates paid to its members on songs...."

Where do the record companies come into this? Aren't we talking about the artists?

apple pays the record companies, not the artists. if the artists demand more from the record company, then the record company demands more of apple, then apple demands more of us.

keep following this chain and we end up with massive inflation. STOP THE NMPA OR WE'LL HAVE A RECESSION. (*ducks*)

nevertheless, that's how the record companies come into it.

[Phizz]

What about a little thing called inflation? Prices would inevitably have to go over 99c anyway. Were they gonna shut down then?

[federmoose]

Originally Posted by neondiet

iTMS

We're now too lazy to type iTunes Music Store? where will it end?

[Xian Zhu Xuande]

Eh... they'll run it at a loss to support their other products if that happens.

Especially if competitors go above the $.99 mark.

[federmoose]

Originally Posted by Xian Zhu Xuande

Eh... they'll run it at a loss to support their other products if that happens.

Especially if competitors go above the $.99 mark.

speaking of which, is the amazon online music store running at a profit or loss?

[echosonic]

Originally Posted by Xian Zhu Xuande

Eh... they'll run it at a loss to support their other products if that happens.

Especially if competitors go above the $.99 mark.

HELLO!! A voice of reason!

First of all, if Apple ate 15 of their alleged 30 cent profit per song, do any of you actually think they will be taking a loss? The iTunes store is a server farm somewhere in Cupertino that generates residual income in the billions for the price of a monthly electric bill in the thousands.

Second, The iTunes Store is so completely intertwined into the iPod/iPhone business model, there is NO WAY they can shut its doors. NO EFFING WAY. Not gonna happen when they hold 85% of the market share.

With all due respect to Eddy Cue, even as a fanboy I recognize posturing when I hear it. This is froth. A bluff.

You'd have a better chance of seeing the Pope's balls than seeing the iTunes Store close down.

[wobegon]

Originally Posted by federmoose

We're now too lazy to type iTunes Music Store? where will it end?

People have been abbreviating the iTunes Music Store as iTMS for years.

[federmoose]

Originally Posted by echosonic

First of all, if Apple ate 15 of their alleged 30 cent profit per song, do any of you actually think they will be taking a loss? The iTunes store is a server farm somewhere in Cupertino that generates residual income in the billions for the price of a monthly electric bill in the thousands.

Second, The iTunes Store is so completely intertwined into the iPod/iPhone business model, there is NO WAY they can shut its doors. NO EFFING WAY. Not gonna happen when they hold 85% of the market share.

I think you underestimate the cost of the itunes store. it needs to be coded, it needs to be maintained, it needs to be upgraded, and then there's the hardware... which also needs to be maintained, upgraded, kept redundant, etc.. you may have been exaggerating to make a point, but in case you weren't there is a little more to the apple store than you think.

I agree that the itunes store is intertwined with its business model, but then apple would be relying on the ipods and iphones to cover the lost revenue (and plausibly lost profit) of the itunes store. they would probably do it, but they'd search for a new model, because that isn't a good way to run a business.

[federmoose]

Originally Posted by wobegon

People have been abbreviating the iTunes Music Store as iTMS for years.

now I feel old .
but seriously, your fingers need exercise too!

[SpamSandwich]

Originally Posted by HyteProsector

I find all of this to be rather hilarious. In an age were record companies are becoming less and less relevant, they ask for more. Haha. They're like squirrels hoarding nuts for the winter. I'm not saying that record companies are going away, just that their whole business model is getting rearranged. (Look at Radiohead, NIN, Moby and the momentum of Myspace) I would like to see Apple play hardball with these losers. Maybe cancel iTMS, and release iTunes 8.1 with increased compatibility with Limewire. And then throw a marketing campeign behind it for good measure. I'm not saying Apple will do this or even that they should. I would just like to see the impact it has on record sales.

No, this relates to the copyright holders, not the labels specifically. More often than not, it would refer to the musician(s), and also their publishing companies.

[SpamSandwich]

Originally Posted by anantksundaram

I am confused: The article talks about "National Music Publishers' Association" wanting "to raise the rates paid to its members on songs...."

Where do the record companies come into this? Aren't we talking about the artists?

Correct, it has little or nothing to do with the labels.

[SpamSandwich]

Originally Posted by bloggerblog

So Apple gets 29 cents to host albums and take care of transactions and run the iTunes store, sounds fair.

Record companies collect 70 cents for... uhmm... errr... i dunno... but pays artists for producing the music 9.1 cents per sale!!! Sounds like a total rip off to me, artists should cut the middle man, follow in the footsteps of Prince. But I think artists are trapped in a contract and think they have too much to lose if they complain.

Musicians, like actors are a dime a dozen and most of them will never make a lot of money... if they choose to compete in the same arena. If they specialize, however, they could do very well for themselves. Example: Moby licenses nearly all of his music for use in commercials, ads, etc. It amounts to background music.

[SpamSandwich]

Originally Posted by federmoose

speaking of which, is the amazon online music store running at a profit or loss?

I'd have to guess that Amazon operates at a net loss, hoping to drive their other business offerings with their low priced music.

[SpamSandwich]

Originally Posted by federmoose

I think you underestimate the cost of the itunes store. it needs to be coded, it needs to be maintained, it needs to be upgraded, and then there's the hardware... which also needs to be maintained, upgraded, kept redundant, etc.. you may have been exaggerating to make a point, but in case you weren't there is a little more to the apple store than you think.

I agree that the itunes store is intertwined with its business model, but then apple would be relying on the ipods and iphones to cover the lost revenue (and plausibly lost profit) of the itunes store. they would probably do it, but they'd search for a new model, because that isn't a good way to run a business.

I think Steve could afford to risk shutting off the music spigot, and he'd provide the phone numbers of the people to complain to. Things would go his way pretty fast.

[FJRabon]

1) Record labels are many things, but making piles of cash is not one fo them. To the people who think that the record labels are a big scam, no, they are making next to nothing right now. You can make the argument that they're inefficient at what they do, especially in this day and age, they're not ripping artists off. Record labels absorb losses on artists far more often than they make profits. They're just hoping that they find that oen big gold mine artist that can support all the other artists who cost the label more than they make.

2) You really don't understand what record labels provide? Recording studios are not cheap. Say what you will about home recording these days, but it still isn't close to matching a professional studio, with professional engineers and professional producers. The record company foots the bill up front for these things. The record companies market the albums, pitching and placing it on radio stations, etc. That's not cheap. Like I said, you can make the argument that record companies should go the way of the dinosaur, but its not because they're ripping artists off, that's an old wives tale, its because they're becoming less and less efficient at dealing with the state of the music industry today.

3) Its hard to say exactly how much is posturing. iTMS is NOT apple's core business. In a recession, they're not going to operate the store at a significant loss. I'm sorry folks. I wouldn't be surprised to see Apple sell off the iTMS's assets to somebody like Amazon. There are obviously a lot of valuable synergies there with the iPod and a directly linked music store and I'd be surprised to see those go away entirely. But I don't think this is necessarily posturing.

4) I found it kind of odd that nobody seems to question whether or not there is no price point where the iTMS could break even or operate at a profit. That seems to be the clearest avenue of attack. The studies that show $.99 as the magical barrier are a little old now. Apple might also cave in and allow record companies to restrict certain albums to "full CD only" downloads, which has been a major issue. Or they may even *gasp* charge different rates for different songs. If they did those things they might be able to get the record companies to eat a little more of the price increase. I for one would be okay with letting artists charge up to 1.50 for new hit singles but also only charging something like .50 for deep album tracks. The one price to rule them all approach seems kind of silly and it has to end EVENTUALLY.

5) Just when the tides were starting to turn in the fight against piracy, as the ratio of legitimately download to illegally downloaded tracks started to inch higher, the music industry is risking shooting itself in the foot here.

[Retrogusto]

Yeah, Apple should just start dealing directly with the artists. Maybe they can start by giving the artists the raise they want, and then say, "By the way, if you want 70 cents instead of 15, let's talk. The record companies offer very little value, and Apple could offer so much more.
And yes, Mr. Israelite, you make nothing from the sale of an iPod just like you make nothing when somebody downloads the songs for free from the Internet, so keep that in mind.

[FJRabon]

Originally Posted by SpamSandwich

Musicians, like actors are a dime a dozen and most of them will never make a lot of money... if they choose to compete in the same arena. If they specialize, however, they could do very well for themselves. Example: Moby licenses nearly all of his music for use in commercials, ads, etc. It amounts to background music.

This is a little disengenuous. There are probably a million guys out there doing the electronica "background" thing that would have no qualms about licensing their music out. Moby just had a very large amount of talent and luck. There is no "magic key" to making it in the music business. You have to be extraordinarily talented, be in the right place at the right time and mostly just get a few key people to like you.

[starrius]

This is highly conceivable. A partnership with either or both of these could also finally help get rid of DRM considering how little, if any, music is sold on Amazon with DRM.

I agree, tho, that the iTMS simply can't go away altogether. Apple owes its current status to iTMS, the iPod, and the iPhone.

snip

Originally Posted by solipsism

But if they did stop their own music store, that doesn't mean that there wouldn't be any music store within iTunes. Apple could get with Amazon, eMusic, et al. to offer a music store portal within the iTunes application. This would instantly and dramatically increase the popularity of any music store portal that Apple could easily ask for their own per track royalties,

(Note: I don't think Apple will forego their music store)

[FJRabon]

Originally Posted by Retrogusto

Yeah, Apple should just start dealing directly with the artists. Maybe they can start by giving the artists the raise they want, and then say, "By the way, if you want 70 cents instead of 15, let's talk. The record companies offer very little value, and Apple could offer so much more.
And yes, Mr. Israelite, you make nothing from the sale of an iPod just like you make nothing when somebody downloads the songs for free from the Internet, so keep that in mind.

There is no way Apple becomes a defacto record label. Running the iTMS is one thing. Doing record deals is another thing entirely. Apple does not want to turn into Sony.

[SpamSandwich]

Originally Posted by FJRabon

This is a little disengenuous. There are probably a million guys out there doing the electronica "background" thing that would have no qualms about licensing their music out. Moby just had a very large amount of talent and luck. There is no "magic key" to making it in the music business. You have to be extraordinarily talented, be in the right place at the right time and mostly just get a few key people to like you.

I don't disagree with you. Entertainment is a very, very competitive business which basically means: no business can support 10 Britney Spears. One is enough, yet there are probably hundreds of singers who copy her to a 't'. Uniqueness is key, and being in the right place at the right time is essential.

[palegolas]

Originally Posted by anantksundaram

Apple's obsession with 99¢, as opposed to, say $1.05, is silly.
Heck, make it $1.09, blame in on the government, and make an extra 4¢ per tune, Apple! I need some sops as a shareholder right about now.....

It's a magical barrier.. the dollar mark. I believe they'll loose millions of spontaneous sales if they take it above the dollar mark. And this has nothing to do with logic, I mean really, what's the 5-10 cents gonna do for each and every one of us? Practically nothing. It's just psychologically more motivating to buy at 99 cents. If it needs to be done, it will be done, and over time customers will become used to it.

Btw, is this US only or is it world wide?

[FJRabon]

Originally Posted by palegolas

Btw, is this US only or is it world wide?

US only. That is why there is a different iTMS for each country. It's also why I doubt its going to cause the iTMS to run at a loss. There are other countries where the royalties are higher and the iTMS still makes a profit.

[solipsism]

Originally Posted by FJRabon

US only. That is why there is a different iTMS for each country. It's also why I doubt its going to cause the iTMS to run at a loss. There are other countries where the royalties are higher and the iTMS still makes a profit.

What countries? Can you post links to such stats?