Apple Could Shutter iTunes if Royalty Rates Rise

By  |  Wednesday, October 1, 2008 at 1:03 pm

iPod users may suddenly find themselves without iTunes if the music industry keeps pushing for higher royalty rates, according to previous comments by iTunes chief Eddy Cue. Although the statement was made nearly a year and a half ago, it did not come to light until Fortune made note of it Tuesday.

Cue’s words have apparently been publicly available here for quite awhile, it’s just that nobody took notice of it. The reason why most reporters missed this is likely due to the fact that at no time in the past has Apple made any overtures that it would do such a thing — only suggesting that higher royalty rates could lead to higher prices, and thus a return by customers to piracy. Cue reemphasizes this in his letter.

The labels are asking for the board to approve a 66% hike in royalties from 9 to 15 cents per track. Apple does not make much of a profit right now to begin with, and further cutting into that with additional royalty payments would make those profits smaller. The board is set to rule on Thursday, according to reports.

Here’s what Cue had to say that has everyone buzzing:

“If [iTunes] was forced to absorb any increase in [royalties], the result would be to significantly increase the likelihood of the store operating at a financial loss – which is no alternative at all. Apple has repeatedly made it 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.”

A shuttering of the iTunes Music Store would be a stunning move. At the same time, with the power Apple holds through its market share, it could send the industry a message that the company is ready to play hardball in maintaining its profit margins, as well as what it sees as a fair price for legal downloads.

Better yet, with distrust of the entertainment industry already at a high level, Apple would likely come out smelling like roses while the record labels look like the bad guy. I don’t necessarily buy Greg Sandoval from CNET’s theory that Apple is acting behind the scenes to reintroduce Cue’s comments into the discussion — its probably just good reporting on Fortune’s part — but if Apple is truly considering this as an option, the consumer should know about it.

Either side has an direct interest in getting a deal done. With CD sales continuing to fall, the record industry needs Apple to recoup at least a portion of those lost revenues. At the same time, Apple needs iTunes — because without it the iPod loses much of its allure, and those willing to absorb the extra cost could eat into the company’s dominance.


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4 Comments For This Post

  1. Alan Says:

    If this passes, I would like to see Apple pull iTunes music store if only for a few days (if they can do that, not sure if they have contracts that say they have to publish certain labels during year x for y number of years). Let the record labels see how much money they are losing without iTunes. Maybe then Apple can come back and say, we’ll charge one buck per track and they all have to be DRM free.

  2. Ed Oswald Says:

    That’s what I’m thinking. Such a move would make the record labels think twice 🙂

  3. Sean Says:

    To Our Customers

    A recent decision by the Copyright Royalty Board coupled with an unwillingness by the RIAA to absorb additional royalty payments to members of the National Music Publishers’ Association has made it impossible to continue to sell music on the iTunes Music Store at what we feel is a fair price for our customers. This has left us with no option other than to close the iTunes Music Store. Please follow the link below:

    We feel this represents a fair alternative for our customers.

  4. AdamC Says:

    BTW most of the songs in the iPods are ripped from CDs and what have you and they can play most of today’s music platforms except the proprietary one that locked into zune.
    In today’s turbulent economic climate it is better to stop loss than run at a loss which may in turn affect the bottom line of the whole company – when Apple lowball their forecast they got hammered and if they missed a guideline hell will break loose.
    @Sean – you are right – there is a free alternative. And songs will be shared among a community freely and free.
    BTW Apple is fighting to bring digital music cheaply to the masses and for this act they are being castigated by many-sad.