Apple Holds iTunes Hostage Over Royalties

A decision expected on Thursday from a three-person government panel could eventually lead to the closure of Apple's (Nasdaq: AAPL) online music, movie and digital book store, iTunes. Or it could provide what many in the digital media industry have long wanted to see: Apple backing away from the line it drew in the sand on pricing.

The Copyright Royalty Board is scheduled to rule on Thursday whether music royalties should rise to 15 US cents from the current nine cents per track. Apple has said that if the cost of its online songs at iTunes were to rise above the 99 cent price point, the company would not be able to operate the site profitably.

"The 99-cent per track retail price point is key to making the overall consumer value proposition compelling," Eddy Cue, global vice president of iTunes, told the Board in testimony last year. "It maximizes revenues for all industry participants by creating a viable substitute for free online music ... while providing iTunes with a profit margin."

An Obsessive Attachment

Whether Apple will blink remains to be seen, assuming the Board does indeed jack up the royalties by six cents. It is possible the company could convince the music industry to absorb the price increase, but that is unlikely, Charles King, principal with Pund-IT, told MacNewsWorld.

"The music industry has been trying to raise the royalties for recording artists for several years now," he noted. "Apple has what some might consider an obsessive attachment to that 99-cent figure."

There are many reasons Apple wouldn't pull the plug on its store, starting with the neat synergy it has developed between the iPod, the iPhone and iTunes. Pull the plug on iTunes, for instance, and sales of both devices are sure to drop.

Apple is known for not backing down in negotiations, though. NBC pulled its programming from the site after the two could not come to an agreement, to cite one example.

Apple did not respond to MacNewsWorld in time for publication.

Old School

It is likely that more clashes will occur between content aggregators and copyright holders now that the digital music model is well established, with iTunes serving as the launching pad for such confrontations.

Over the years since iTunes debuted -- and arguably brought with it a new era of legitimate and consumer-friendly online music venues -- the Internet has become the main distribution channel for music consumption, eclipsing the sale of CDs. The low price points attached to the early agreements in this space are now viewed in the music and movie industry as commercially outdated.

For instance, the Copyright Royalty Board is also considering a proposal put to it by the Digital Media Association, the National Music Publishers' Association, the Recording Industry Association of America, the Nashville Songwriters Association International and the Songwriters Guild of America to change the royalty rates for interactive streaming and limited downloads, including for subscription and ad-supported services. The organizations are proposing a flexible percentage-of-revenue rate structure, with minimum payments in certain circumstances.