Royalty rate doesn't change for Apple, music retailers

The Copyright Royalty Board on Thursday froze the rate that digital-music stores such as iTunes and RealNetworks' Rhapsody must pay music publishers.

The three-member board that sets statutory copyright licenses e-mailed the Digital Media Association (DiMA), the National Music Publishers' Association, Apple, and other download stores with its decision to keep the royalty rate at 9.1 cents a song. The board also set the same rate for CDs and established a 24-cent rate for ringtones. The decision is the first time the board has established royalty rates for digital downloads. The rates are set for the next five years.

What all this means of course is that Apple will not be shuttering iTunes--as if there was ever much of a chance of that--and appears to remain very much in control over the economics of digital music.

Alarm bells were set off on Tuesday when Fortune magazine reported that Apple had told the CRB that "it most likely" would shut down iTunes if forced to pay too high a royalty rate. Eddy Cue, Apple's iTunes manager, had told the royalty board in April 2007 that the company "would not continue to operate (iTunes), if it were no longer possible to do so profitably."

The group representing music publishers had sought a per-song rate boost from 9.1 cents to 15 cents, a 66 percent increase. The rate is paid to music publishers by the record companies, which deduct it from the 70 cents Apple pays them for every song it sells. Certainly, nobody can predict what Apple will do, but at this point, it looks as if the company got what it wanted. In short, Apple won.

"We're pleased with the CRB's decision to keep royalty rates stable," said an Apple spokesman.

" What DiMA had asked for was a reduction to 4.5 cents (or 55 percent). When you look at 9.1 it's only a disaster but 4.5 is Armageddon."

--Rick Carnes, president of the Songwriters Guild of America

A music industry source said that Cue's statement to the CRB may have gone a long way in persuading the CRB not to boost rates. "Sure it was posturing," said the source. "That's what you do in court. I don't think Apple would have gone out of business but a statement like that from the biggest music retailer is going to carry some weight."

Mark Litvack, an entertainment and copyright attorney and a former legal counsel for the Motion Picture Association of America, said rates have traditionally gone up during these kinds of negotiations. But Apple has "effectively set the economics of the music industry, which now appear to be frozen."

Music industry sings the blues
The group representing music publishers applauded the CRB's decision publicly but not everybody on that side of the debate was happy. One music industry source familiar with the negotiations said the publishers would probably have liked more money but should be happy that the CRB didn't attach the rate to a percentage of a music store's revenue.

That would have created huge accounting headaches, according to the source. The decision also prevents DiMA from going to Congress in the same way that the Webcasters did last week, according to the source.

Pandora, an online radio service was part of a movement to negotiate a new rate for streaming music (as opposed to downloads) with the music industry. That movement lobbied hard in Washington and won congressional OK to reach a settlement with the music industry on a compulsory license.

But in my dealings with music publishers, I've heard them complain for a long time about the 9-cent royalty rate. In some corners, the lack of any increase will not be received well. Nobody has been a more vocal proponent of raising rates than Rick Carnes, president of the Songwriters Guild of America. On Thursday, Carnes acknowledged he had hoped for an increase. Still, he insisted there was still plenty to be happy about.

"What DiMA had asked for was a reduction to 4.5 cents (or 55 percent)," said Carnes, who has written songs for Alabama, Reba McEntire, and Dean Martin. "When you look at 9.1 it's only a disaster, but 4.5 is Armageddon...If you look at record sales, they've just been a disaster. It's hard to go to the judges and ask for money at this point of time... Everybody is hurting, frankly, and until we get a solution to the massive looting on the Internet we're not going to be able to move this thing much."

Mike McGuire, a music industry analyst for Gartner, said that the royalty board made a wise decision for consumers, musicians, and download stores by not raising rates. The download stores are competing against piracy, and obtaining illegal downloads is simple and they're hard to compete with on price: they're free.

"This was a smart move by the CRB," McGuire said. "This is still a new and struggling industry and now isn't the time for a drastic rate increase that will have an effect on pricing."

[Zen-Masta]

Apple bluffed big time. Look, if cogs go up then that's that. They would be forced to raise their price just like everyone else did...If Apple closed, itunes that would devastate their device sales because then they obviously couldn't advertise the millions of songs they offer. Hardware mark up is the cornerstone of Apple. On top of that, the other players still left in the game would be more than willing to take over the millions of customers Apple abandoned, zune, real, walmart, napster etc.

[DPSULLY]

I don't think Apple's COGS would have gone up. They keep 30% of a 99 cent download regardless. From the balance it's the label that has to pay out the mechanical royalty (still 9.1 cents) to the publisher plus any artist royalty.

[Penguinisto]

Bluff?

When you own the vast majority of a market, you don't have to bluff. You simply tell it like it is and the negotiations end right there.

Now if Apple was rapidly losing marketshare, or Amazon did DRM, then maybe the music cartels would have some leverage... but IMHO it is the music industry that bluffed, got called, and buckled under.

[DPSULLY]

CRB did not "raise" the rate of ringtones to 24 cents. Despite the 10/16/06 ruling, this is actually the first time a compulsory rate has been established for ringtones. Publishers did well given that 10% of retail on a $2.49 ringtone had been yielding them 25 cents. Of course, they're probably upset the DPD rate stayed the same.

[myles taylor]

Bluffing or not, it worked. It's about time!

[Francky B]

I find it appalling that developers on the iphone App store get 70% of the profit from their app (rightfully so I might add), but Artists can't get more than 9%.. That to me is screwed up. The culprit in this is partly Apple and others, but mostly the Recording Cartel, uhm I mean Industry. I'm sure they get something like 50% which to me is ridiculous...

I can only hope in time, artist stop being dependent of the recording industry and start using new distribution methods so the RIAA cartel can die a slow death. Then at least artists would get a fair share.

[bluejonhi]

I don't know what you mean Francky B...all independent artists get paid 70% for tracks sold on iTunes, just like independent developers get 70% for apps sold. Obviously if they are signed to a label or an aggregator they lose part of that %. But to be honest I still don't get what happens to that 9% publishing royalty for artists who don't have a publishing deal. Any thoughts on this?

[Thomas, David]

As one poster eluded to, you are making uninformed statements. The RIAA, and MPAA have always used "magical" accounting practices to make money disappear before they ever reach the creators of the content. This has been notoriously true in the music industry, by way of the record labels and their 'creative' accounting. For those of you arguing the questionable practice of subscribing to music, maybe you might look into their accounting practices to see why the labels love the idea of subscription music.

Any artist putting their own content on iTunes does not have to worry about such things (if they are not under contract to someone else).

[protagonistic]

You might want to take the time to get the facts before posting. The reason the artists get what they do is because of the RIAA and has absolutely nothing to do with Apple. The RIAA is the reason almost all of my music is from independent artists these days. If you want to help the artist start buying music that has no affiliation with the RIAA.

[holycow]

Artists don't have to sign their rights away to the music companies at all. They can market and carry the risk of selling or not selling their songs on their own. There is no need to have any sympathy for artists, they sign their rights away for an advance and for allocating the risk to others.

They have only themselves to blame. App developers on the other hand do not sign their rights to Apple, they simply use the Apple store to sell their products. Big difference, but they carry the risk of not selling enough to make money. Apple does not carry this risk for them.

[bluejonhi]

I don't know what you mean Francky B...all independent artists get paid 70% for tracks sold on iTunes, just like independent developers get 70% for apps sold. Obviously if they are signed to a label or an aggregator they lose part of that %. But to be honest I still don't get what happens to that 9% publishing royalty for artists who don't have a publishing deal. Any thoughts on this?

[bluejonhi]

I'm assuming that the 9 cents is coming out of the 30 cents that iTunes takes from the sale of each track which is why going from 9 cents to 15 cents was a big problem for them...am I wrong?

[Thomas, David]

You are correct.

Why would the labels want to argue they should actually pay the creators! That would be too funny, and quite frankly, it would be snowing in hell at that point. No, you are right, they want someone else to pay, and make it look like it's someone else stealing from the creators.

[darkstar32170]

If you read the article carefully you will notice that it says that the 9.1 cents comes out of the 70 cents that Apple pays to the record companies. I can only assume that Apple's deal with the record companies includes a clause that says that if the publisher's royalty increases Apple has to cover the increase. All-in-all the result and bottom line is the same.

[timl2k8]

This is really confusing. Where does the rest of the money go?

[Riquez-001]

hard to compete with on price: THEY'RE free

[sandonet]

My bad. Thanks for the heads up. GS

[rhmartens]

Whether itunes runs or not does not concern me as when you buy music from itunes, it is locked so you cant do anything with the music anyway. I would prefer to buy a cd and download into the computer to do with what I want. I can buy from different online cd and dvd distributers. But of coarse waiting weeks to receive goods. I have bought a lot of music from itunes and it is good. But some of my players will not play. Im not buying an ipod to play music that is like a type of monopoly that microsoft was accused of years ago. Now it seems the ball is in the other court. I like apply products I have a few apple computers.
When itunes unlocks their music, then it wont matter if the price increases. It will give people more incentive to buy music online. Both sides will win. The musicians and the customers. You can then make power shows with music you bought to send to your friends without the fear of it not working.

[AEVoigt]

Other than iTunes, which is of course very relevant as it is a market leader, independent record companies do have a problem here. I am involved with a UK based independent record label and we were very interested in the outcome of this decision. In the UK, the digital retailer is responsible for payment of digital publishing royalties, not the record company. So the record company doesn't bear the responsibility of paying out the royalty - it is the responsibility of the retailer. In the US however, it is the duty of the record label to pay out the royalty. It is in inconsequential however who pays the money - if the retailer pays then the record company receives less money and the artist receives less in turn. If the record company pays then it receives more money but pays out the royalty itself and the artist receives the same record royalty.

What is a huge problem here is the fact that the publishing royalty rate is a fixed cost, not a percentage. This is a massive problem when you consider that with the increasingly common subscription method of digital music sales, where unlimited music can be downloaded for a monthly fee, the net received by a record company for the sale of one song can be as little as 20c. Pay 9.1c out of that for the publishing royalty and that's a massive 45% of net revenue being paid out to the publisher. That leaves such a small margin there's no money left to pay the artist or the label fairly. It would be much fairer if the publishing royalty were a percentage of revenue. That's how every other royalty is paid out in the music business. I'm very sorry that the CRB has not addressed this issue properly and has not understood how out of balance the current system is. Record companies cannot be asked to pay out exorbitant sums when the money simply isn't there anymore.