September 30 2008

Music Industry Looks For Higher Royalty Rates For Digital Downloads

The Copyright Royalty Board (CRB) in Washington, D.C. is set to rule on Thursday over a request from the National Music Publishers’ Association (NMPA) to raise the royalty rate paid on digital downloads.

It seems the NMPA has decided it is time for royalties to go up, and seeing as CD sales are on the decline, the record companies have pawned off the request to the digital download market.  The current royalty rate is $.09 a song and they are requesting an increase to $.15, a hike of more than 60%.

Seeing as Apple’s iTunes store currently controls 80% of the digital music market, it is fairly obvious this move is squarely directed at them.

Under the current system, on a $.99 song sale, it is believed Apple already gives away $.70 in royalties and rights.  Of the remaining $.29, very little is actually profit as the majority goes to maintaining the store, paperwork and so on.  This new rate would lower Apple’s share to $.23, and they are saying at that price they would actually be losing money.

As Apple is like any other business, and wishes to make money, iTunes vice president Eddy Cue has made a rather ominous threat via an article on CNN Money.

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.

I personally find it highly unlikely that Apple would actually go that far, but it does seem when one company controls 80% of a market, and is projected to go as high as 85%, that this does seem a rather unfair targeting of them. It does also put them in a position where their threat should be taken very seriously.  Apple does have a counter-proposal on the table of a percentage of wholesale that would work out to an actual reduction of royalties, but somehow I don’t see that flying either.

David Israelite, president of the National Music Publishers Association, is saying that everyone should embrace the royalty increase because ultimately everyone involved will prosper. Um… yeah… sure, I see that. -scratches head- There was a more telling quote in the CNN Money story from Mr. Israelite that I think sums up the core of this whole issue.

“Apple may want to sell songs cheaply to sell iPods. We don’t make a penny on the sale of an iPod.”

Ah, yeah, there we go again.  Remember back in 2005 when Edgar Bronfman, CEO of the Warner Music Group, thought record companies should earn a percentage from the sale of each iPod sold as Apple wouldn’t be able to sell their products without music to put on it.  Luckily that idea was quickly squashed, but here it is rearing it’s ugly head again, just in a different form.

So Apple is once again being targeted for basically being profitable.  Well, let me ask the music industry a very simple set of questions: Did you collect payments for sales of record players?  8 Track players?  Tape decks?  CD Players?  On and on and on, why is it now okay to target one hardware manufacturer because they have the most popular version of it?

Once again, here we are with the music industry again trying to get more blood out of a turnip, never mind their greed may end up harming things.  Say this passes and Apple finally gives in to raising their prices, this will inevitably leads to lower sales, and in turn, lower royalties.  Say Apple would shut down iTunes, then there would be no royalties at all.  Gee, are either of these desirable for any party involved.  How would everyone “prosper” again?

Stupid, stupid music companies.

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