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iTunes Faces Threat Over Possible Royalty Increase

Apple’s iTunes may be threatened as a ruling this week could force music retailers to pay publishers more money.

Feeling the recent pressure from the National Music Publishers Association, Washington D.C.’s Copyright Royalty Board is expected to make a decision this Thursday on increasing royalty rates paid to music publishers from songs purchased through online retailers such as iTunes. The publishers association is requesting a 66% rate increase from the current 9 cents to 15 cents per track.

Made up of a three member panel who oversee “statutory licenses granted under federal copyright law,” one of the Copyright Royalty Board’s duties include setting royalty rates under federal copyright law. Thursday’s decision will set the digital music royalty rates for the next five years. While Apple has declined to comment on the board’s upcoming decision, they certainly have made their opposition to a rate increase clear, and understandably so. A statement submitted by iTunes Vice President Eddy Cue to the board last year noted that the company would rather shut down iTunes operations than increase the 99 cent per song price or absorb increased royalty rates.

“If the [iTunes music store] was forced to 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,” Cue wrote. “Apple has repeatedly made it clear that it is in this business to make money, and most likely would not continue to operate [the iTunes music store] if it were no longer possible to do so profitably.”

It would certainly be hard to imagine that Apple could shut down iTunes all together if royalty rates are raised, seeing as though they have used it to drive iPod sales since 2003. Before the opening of iTunes, consumers had limited options in where they could legally obtain digital music. Despite Piper Jaffray estimates that iTunes will maintain an 85% share of the digital music market this year, selling 2.4 billion songs, Eddie Cue notes that Apple’s profit margin from iTunes sales remain low. This is due to the fact that Apple does not believe that the market is strong enough to handle a price increase per song, stating “I have no doubt that an increase in the per track price would lower total music purchases at the store.”

It is estimated that Apple pays 70 cents on every dollar to record companies who are responsible for each track. The record companies in turn hand over 9 cents to the publishers who hold the copyrights to these songs. Unwilling to pay a royalty increase out of pocket, they are now requesting the the Copyright Royalty Board get rid of the fixed per-song payment and rather institute 8% of wholesale revenues to be paid. The Digital Media Association, who represents Apple, is however, requesting that the current royalty fees be reduced to 4.8 cents per track, making the Board’s decision all the more complicated.

The publishers seem unwilling to relinquish any additional and argue that the market is ever expanding and justify increased royalty rates because all parties involved will eventually profit. President of the Nation Music Publishers Association, David Israelite has stated, “I think we established a case for an increase in the royalties…More importantly, we were able to beat back the proposal that could be a [royalty] cut.” He went on to add, “Apple may want to sell songs cheaply to sell iPods,” he said. “We don’t make a penny on the sale of an iPod.”

[Fortune]