Apple Threatens To Close iTunes Store If Fee Hiked
On Thursday, the Copyright Royalty Board (CRB) in Washington, D.C., is scheduled to vote on a request by the National Music Publishers Association to increase the royalties paid to its members for online music sales. Artists are currently paid a royalty of nine cents and want the CRB to increase it to 15 cents.
The move is opposed by the Recording Industry Association of America and the Digital Media Association, a trade group of online music retailers that includes AOL, Apple, MusicNet, Napster, RealNetworks and Yahoo.
The CRB's decision will be the first to address the sale of digital music and will establish royalty rates for publishers and artists for the next five years.
Thin Margins for iTunes
None of the opponents of the royalty hike have been as emphatic as Apple, and the reason isn't hard to discern. Apple's online iTunes Store is the largest and most successful digital delivery service, and an increase would mean some difficult choices.
In a filing with the CRB last year, iTunes Vice President Eddy Cue said Apple has invested millions in the online store, and providing a quality consumer experience costs Apple a huge amount each month.
"The fact is," Cue wrote, "that even though we are optimistic about the future of the online music marketplace and heartened by iTunes' success so far, there are significant risks posed by very high operating costs, the infancy of the market, the evolving nature of the business models attempting to provide digital music to customers, and the competitive pressures that we face -- particularly from privacy."
The digital-music business, Cue told the CRB, has very small margins, and it is only because Apple recognizes that fact that the iTunes Store has never lost money. That could change, he said, if the royalty rate is increased.
"Any increase in the royalty rates we pay for musical works would have a significant adverse impact on the commercial viability of iTunes," he warned. "The industry needs reduced, not increased, costs in order to continue to attract the investments necessary to its growth and stability."
Would Apple Really Cook the Golden Goose?
But what really caught people's attention was Cue's suggestion that a royalty increase might cause Apple to shut down the iTunes Store.
If the CRB raises the royalty rates, Cue said, Apple would be faced with two options: Increase the retail cost of music tracks, which in turn would reduce sales; or absorb the cost of the royalty increase, which would erode the company's profit margin.
"Apple has repeatedly made clear," Cue warned, "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."
Most analysts think Apple is unlikely to summarily shut down the iTunes Store. The online store handles 85 percent of the world's digital-music sales, or 2.5 billion tracks. Moreover, the store plays a tremendously important role in driving sales of Apple's iconic music hardware, the iPod, and now its music/app devices, the iPhone and iPod Touch.
Nonetheless, the threat to pull the plug gives Apple a sizable bargaining chip. Whether it is one that the CRB thinks is valuable will be seen this week.