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.
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."
Apple did indeed say that if it couldn't make a profit, it "most likely" will not continue to operate iTunes. You can find a copy of the statement here on page 4 (PDF).
Fortune magazine published a bombshell of a story on Tuesday by reporting that Apple once threatened to close iTunes if forced to pay more for music royalties. A more careful reading of the statement from an Apple executive shows that it was more of a veiled threat. Regardless, it's possible Apple could shut down iTunes.
But is it likely? No. Here's why:
Screen grab of the document Apple filed with Copyright Royalty Board
First, the comment was made by Eddy Cue, vice president in charge of Apple's iTunes Store, in a written statement to the Copyright Royalty Board sometime before April 2007. The CRB is a three-judge panel that determines rates for statutory copyright licenses. On Thursday, the CRB is supposed to rule on a proposal by the National Music Publishers' Association to make download stores pay more for the songs they sell. The publishers want an increase from 9 cents a track to 15 cents, a 66-percent jump.
Representatives from the NMPA could not be reached.
In his letter to the CRB, Cue said he had no doubt that raising music prices at iTunes would reduce the number of purchases, stifle customer growth, and shrink payments to artists. If iTunes were to absorb the increase in royalty rates, then the store would likely lose money and the company wasn't interested in that.
Here's the meat of his statement: "Apple has repeatedly made clear that it is in this business to make money, and most likely would not continue to operate (iTunes) if it were no longer possible to do so profitably."
Cue's comment that the company has "repeatedly made clear" is something else to look at closely. I can't find another example where Apple has said it will shut down iTunes. Two music industry sources told me that at no time have iTunes' representatives made such a statement to the record labels--not in negotiations, not in passing, never.
Still, there's no denying that Cue told the CRB that the company might shut down iTunes if forced to pay higher royalties. I have to question why it has taken 18 months for Cue's comments to come to light, and why they're popping up just two days before the board is scheduled to rule on a possible rate hike?
Maybe it's coincidence. Or maybe 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.
The other possibility is that Apple could pull the plug on iTunes. But how likely is that? Would Apple CEO Steve Jobs leave iPod owners without anything to watch or listen to? In such a scenario, consumers would be predictably angry and direct much of it at the music industry. Then, I suspect, they would go out and buy music from Amazon.com or someone else.
Apple has sold more than 160 million iPods, and iTunes has sold over 5 billion songs. The store is now the country's largest music retailer. Apple isn't going to throw that away, and the music industry isn't going to risk losing its largest distributor.
Look for a deal to get done soon.
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