With digital royalty rates due to rise, a threat by Apple to close iTunes emerges — but would they really do it?
The BBC has reported that an 18-month old threat from Apple that it might close iTunes has emerged just as digital music royalties are due to rise. And yes, they’re connected.
They digital music royalty rates could rise today from nine cents per track to 15 cents, as the Copyright Royalty Board meets to request the increase. And who would pay that increase? It would be the customer, the retailer or the record company – and you can pretty safely say it won’t be the record company.
What about the retailer? Apple has said it won’t increase its 99 cents a track price or absorb the rise. It opposed the increase in testimony to the Copyright Royalty Board at the Library of Congress in April last year.
Eddie Cue, Apple’s VP for iTunes, said then:
"If iTS (iTunes Store) were forced to absorb any increase in the mechanical royalty rates, 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 clear that it is in this business to make money, and would most likely not continue to operate iTS if it were no longer possible to do so profitably."
Apple has an estimated 85% share of the digital music market, and is on track to sell 2.4 billion songs this year, although it’s facing stiff competition from other download services. Along with other members of the Digital Music Association, Apple has asked for the royalty increase to be limited to 4.8 cents a track.
However, David Israelite, president of the National Music Publishers’ Association, pointed out:
"Apple may want to sell songs cheaply to sell iPods. We don’t make a penny on the sale of an iPod."
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RSSCongress has historically set the mechanical rates and the fees are paid to the song writer/publisher of the underlaying composition. Often major labels only record music in their catalog which means they can waive paying themselves. Its when they record the music in someone else's catalog where these fees typically are a factor.
Previously when rates to cover songs have increased, record labels absorbed it - the price of CDs does not rise due to an increase in mechanical royalties. They just stop recording music that they don't have any publishing rights to.
When selling digital content - the labels are making a larger percentage of profit - they don't have to press a disc and print inserts and then warehouse and ship them to different locations.
The split typically on iTunes with major labels is .70 going to the label - .29 to iTunes. I work with an independent download site www.austinmusicdownload.com and our clients/labels must pay their own mechanical licenses from the funds they receive. No different than iTunes or any store that sells physical CDs.
To suggest that iTunes absorb the increase is a new dynamic and one that historically has no precedence of which I am aware.
So this would seem to be a tempest in a teapot. The labels would appear to really have a "beef" with Congress and would perhaps want to someone else buy their dinner.
The iTunes Store's market share maybe 85% of LEGAL music downloads as you claim. That translate to less than 28% of total music downloads.
The reason Apple might be forced to absorb the rate hike is that the alternative, raising prices, will just lower LEGAL downloads share of total music downloads.
Also, in order to pass on a 6 cent cost to consumers, Apple would have to raise the price 20 cents, as 70 percent of any price increase would go to music publishers. A consumer price increase could also trigger additional costs - a 20 cent increase might increase sales tax by 1 cent, credit card transaction fees by 1 cent, etc. Apple would have to increase prices by 8 cents in order to recover those two cents, unless a 28 cent price increase results in a 2 cent sales tax increase.