The National Music Publishers' Association is looking to increase the rates between 9 cents and 15 cents for each song downloaded, a 66 percent hike. Apple, not surprisingly, is fighting the proposal and instead supports a royalty raise of between 4 percent and 6 percent.
Eddy Cue, iTunes vice president, wrote that the National Music Publishers' Association's increase could force Apple to close the iTunes store. Cue cites the $0.99 price point as critical.
"The $0.99 per-track retail price point is key to making the overall consumer value proposition compelling. It maximizes revenues for all industry participants by creating a viable substitute for free music online, thereby encouraging and expanding the lawful consumption of digital music while providing [the iTunes Store] with a profit margin (albeit a thin one) that encourages Apple to continue to make the investments that are necessary for [the iTunes Store's] survival and growth," Cue wrote.
From there the tone of Cue's message turns ominous for iTunes lovers. He goes on to say that if more profit is sliced out of Apple's margins, it stops making sense for the company to continue running the store.
"Any increase in the royalty rate for DPDs will reduce aggregate revenues for copyright holders and stall or reverse the growth of lawful digital distribution channels for music. [The iTunes Store's] cost structure and margins are not flexible enough to enable the company to incur an increase in the mechanical royalty rate for DPDs without either (i) imposing a retail price hike that will reduce consumption and thereby reduce overall industry revenues or (ii) absorbing the cost input increase, eroding its margin and thereby jeopardizing its continued ability to remain in the business," Cue wrote.
It's interesting that Cue is framing his argument to keep royalties low in the context of music piracy and overall industry revenue. Especially when he continues to state that Apple iTunes exists for the sole purpose of making money.
"Alternatively, if [the iTunes Store] were forced simply to absorb any increase in mechanical 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," wrote Cue.
And he continues with his most direct threat to close the online retail marketplace.
"Apple has repeatedly made clear that it is in this business to make money, and most likely would not continue to operate [the iTunes Store] if it were no longer possible to do so profitably," wrote Cue.
Apple's goal here is transparent: it wants to make money with the iTunes Store by keeping royalty prices low and profiting off the "thin" margin it makes on each download. Of course, the store is the world's largest music retailer with more than 4 billion downloads to date—and even a thin margin on 4 billion of anything probably results in a nice profit.
Why use piracy and the overall health over the music industry as part of the argument? It seems that Cue and Apple are trying to play the role of white knight, riding in to save the industry and further propagate music downloads for everyone. But in the same breath Cue clearly and obviously states that making money is the primary goal, which, let's face it, anyone in business can relate to.
It's sort of a selfish Robin Hood scenario: steal from the rich and give to yourself. That doesn't have quite the same ring, does it? On the other hand, Cue's target is the record industry, which hardly qualifies as a charitable cause. Labels continue to grasp at straws to keep up with the direction music distribution is moving in an online world.
Simply put, rather than trying to come up with a way to capitalize on new models of distribution, the music industry is constantly trying to steal from the individuals and companies who have figured out how to function in the new arena.
But Apple and the iTunes Store don't exactly come out smelling rosy on this one, either. Instead of recognizing its place in the music industry, it has taken the role of an angry 10-year-old on the basketball court. Because Apple doesn't like being picked last, it is just going to take its ball and go.
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