Could new royalty rates kill iTunes?

By Chris Gaylord | 10.01.08

After carving out a major place for itself in the music industry, Apple warned that new royalty rates could spell doom for its iTunes Store.

Washington’s Copyright Royalty Board will decide Thursday how much music publishers may charge for each song downloaded through online stores. In this battle over slices of the pie, the National Music Publisher’s Association is pushing to increase the standard price-per-track royalty fee from 9 cents to 15 cents. This 66-percent hike is too much, says Apple. It wants the fee closer to 4.8 cents per song, bringing it back down to 1980s levels, according to Ars Technica.

“If [the iTunes store were] forced to simply 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,” Eddy Cue, Apple’s VP of in charge of the iTunes Store, wrote in a statement to the royalty board. “Apple has repeatedly made clear that it is in this business to make money, and most likely would not continue to operate [the iTunes store] if it were no longer possible to do so profitably.”

Fortune led the charge this week with an article on Tuesday playing up this quote from Mr. Cue. By the way, he issued this warning 18 months ago, but somehow it really only made a big splash now.

After Fortune’s article, many analysts have skeptically asked: Really? Really? Apple would shutter its iTunes store, now the largest music retailer in the country (online or otherwise), because of a few pennies per song? After selling 5 billion tracks, iTunes would just close up shop? Really?

Apple has not said anything publicly this week.

An increase to 15 cents, which is not set in stone, would certainly cut into Apple’s bottom line. Some estimate that it would chop iTunes’s profits by 20 percent. Or, iTunes could move away from it’s 99-cent model, settling on a higher cost or rolling out variable pricing (something the labels have wanted for a long time). But if the prices go up, sales will probably go down.

With the decision coming down Thursday, CNET’s Greg Sandoval wonders if Apple fed this line to the media as a PR move:

[M]aybe Apple is firing a public-relations shot across the bow of the music industry and CRB. When it comes down to mass appeal, Apple holds all the cards. If word gets out that music publishers are trying to stick it to consumers, and Apple is fighting to keep prices down on their behalf, well, there’s liable to be public backlash against the record industry. If this thing follows the normal course, there would be calls for boycotts, protests, and so on.

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