Wired reports today that Apple has threatened to shut down the iTunes Store if the Copyright Royalty Board votes on Thursday to increase by .06 the royalties paid to publishers and songwriters.

That’s right, they’ll close down iTunes.

Apple pays about $.70 per song to the record companies, with the royalties taken from that.  Apple gets the other $.29.  That’s not much of a margin for Apple.  They obviously don’t want to have to absorb the royalty increase, nor do they want to raise the price of songs from $.99 to $1.05.  In testimony [it's a ginormous PDF, so you're forewarned] before the CRB, Eddy Cue, Global Vice President of iTunes, said:

“Apple has repeatedly made it clear that it is in this business to make money, and most likely would not continue to operate iTS if it were no longer possible to do so profitably.”  (Excerpted from page 3 of the testimony.)

Why the brinkmanship?  After all, Apple is a $98 billion dollar company.  The royalty increase is like chump change, right?

Let’s do the math.  In 2007, U.S. music fans downloaded 844 million songs from online stores.  (Source: WSJ, subscription required.)  Apple controls 85% of that market.  (Source: TechCrunch.)  Apple makes $.29 from every song they sell.  So their income from U.S. iTunes song sales is about $218 million.  The extra royalties would be around $45 million, about 21% of Apple’s U.S. iTunes profit.

So the royalty increase is, relatively speaking, significant.  But does that warrant closing the iTunes Store?  No way.  Apple would sell less iPods — 3Q 2008 revenue: $1.7 billion — the real reason why iTunes exists in the first place.  They just want to break even on iTunes.  And they’re trying to get people’s attention, that’s all.

Submitted by: Dan Giancaterino, Education Services Manager
on October 01, 2008 - 2:08 pm

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