The biggest threat to iTunes may not come from the AC/DC after all, but from within Apple itself. On Thursday, the Copyright Royalty Board is expected to rule on a request from the National Music Publishers' Association, the group that represents musicians and songwriters, to increase royalty rates by 66% percent from 9 cents a track to 15 cents. Yesterday, Fortune reported that in a written statement to the Copyright Royalty Board last year, iTunes vice president Eddie Cue threatened to pull the plug on the iTunes Store if royalty rates to music publishers were increased. "Apple has repeatedly made it clear that it is in this business to make money," Cue said in his statement. "And most likely would not continue to operate [the iTunes music store] if it were no longer possible to do so profitably." Apple is arguing that an increase to 15 cents per track would force Apple to raise prices at the iTunes store from the current standard of 99 cents. To do so, Apple believes, would significantly dampen sales and drive away customers in a market Apple considers to be very fragile.
Currently, Apple pays about 70 cents of every dollar in iTunes store revenue to record labels, which then turn around and pay out 9 cents to the music publishers. Both the record companies and online music retailers have submitted counter proposals to the Royalty Board, whose decision on Thursday will set royalty rates for the next five years. The labels want to do away with a fixed royalty rate altogether and simply pay 8 percent of total revenue to music publishers. On the other side, the Digital Music Association, an umbrella group that represents online music sellers including Apple, is asking for a significant decrease to 4.8 cents a track, almost a 50 percent pay cut.
According to the Recording Industry Assocation of America online music sales rose by 46% to 1.2 billion in 2007, however, Apple maintains that the profit margin for online music retailers is still very small.
So would Apple shut down the largest music retailer in the United States? Not likely. To do so would mean shutting out millions of consumers who are heavily invested in iPods and iPhones, making it more difficult for them to get new content on their mobile devices. And let's not forget that while music is a core part of the iTunes Store, it has evolved into a complete digital marketplace for movies, TV, games, applications, and podcasts. Apple would not only be throwing away revenue from most of these sources, but would also have to open up the iPod to be compatible with any music program or suffer huge losses in a market it largely controls and (and draws a lot of revenue from). Yes, the record companies would be to blame as well, but who are you going to blame when your $400 machine doesn't do what it used to? The content producer or the company that made your device in the first place?
To read Cue's statement to the Copyright Royalty Board, click here.
