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Tuesday, September 30, 2008, 01:00 pm PT (04:00 pm ET)

Apple threatens to shutter iTunes over proposed royalty hikes

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."