Apple Threatened To Close iTunes If Royalties Were Raised?
from the empty-threats dept
According to Fortune, Apple threatened to shut down iTunes if copyright royalties were raised by the Copyright Royalty Board. I tend to share Greg Sandoval's skepticism about the seriousness of this statement. Apple makes most of its money from selling hardware platforms, and iTunes is mostly designed to make those platforms more valuable. While some reports suggest that Apple ekes out a tiny profit on iTunes, others have reported that it's already something of a loss leader for the company, with razor thin margins. You can certainly understand why the company would be upset about the idea of increased royalties, which would shrink those margins even further, but the idea that the company would shut down iTunes, seems like a case of cutting off your nose to spite your face. Even at a small loss, iTunes makes iPods and iPhones much more valuable, and Apple should be able to absorb the hit on the iTunes side via the hardware side. The same is probably not true for other digital media sellers, however.Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.
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Filed Under: copyright, itunes, loss leader, royalties
Companies: apple
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Re: Not a Threat
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The music player functionality of iTunes will still work. I don't even use the music store. Also the streaming radio feeds would still be there, all of the podcasts would be there, and any music deals they can work out without raising the cost to them would be there. Might be an awesome chance for more independants to get noticed.
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Hear, hear!
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Of course there are alternative stores, for some music anyway, but if they get hit with the royalty increase too, they may be in just the same boat as Apple, either having to raise prices or shut down. The difference is that the music they sold will be in open mp3 format, meaning no loss to the customers. If Apple shuts down iTunes, that would become the single most devastating loss of customer-purchased music due to DRM restrictions. Just think if the millions (or is it billions now?) of songs purchased through not able to be transferred to new computers, at least not without an iPod. One way or another, somebody's gonna get screwed over if that happens.
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You do know there are ways to get around that right? Sound converters (SourceForge anyone?) or even just burning it to regular audio format then ripping it again? (the latter loses some sound quality but, it does work.)
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Re: Re:
Of course this is all just speculation on my part. I really have no idea how it would all go down. I'm just imagining some possible outcomes.....
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Right now Apple probably breaks even, or maybe operates iTunes at a slight loss. However, if Apple's costs were to increase, and if Apple started losing money on each song, would it really be worth it to sell those 32 songs? I certainly don't think so.
However, it'll never come to that because a deal will be worked out.
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Selling 5 billion of ANYTHING at $1/shot is pretty fucking impressive, I'd say.
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at 99 cents a track it's like $10,000 to fill a 40gb ipod, 32 songs per ipod sounds pretty generous actually.
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Amazon?
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Do research
Nice way to do research this took me 2 seconds.
http://blog.wired.com/music/2008/03/apple-apparentl.html
570 million seems like a profit to me, but go figure. Their profit according to the article (which most of you will not click on and instantly try to discount my post) is about $.29
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Re: Do research
Sorry
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Re: Do research
Assuming that Apple has a couple of other expenses other than my cut...I don't see that it's possible to have even close to a 30% margin.
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Re: Do research
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Re: Re: Do research
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Re: Re: Re: Do research
For the people who produce it. The people who resell it still have to pay royalties under the current business model.
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Re: Re: Re: Do research
Good that you're trying to get educated, though!
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Re: Re: Do research
570 million
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Re: Re: Re: Do research
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Re: Re: Re: Do research
You can argue anything you want if you get to make up the numbers.
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Re: Re: Re: Do research
570 million
So? What's your point?
After years of fighting online music, everyone's finally realizing it can be profitable, so let's charge more? I mean, when main players were running around, chasing people down for a $1.00 song and suing, Apple made it work.
Apple deserves it. Now CRB wants to penalize with essentially a new tax? I don't get it. The economics of this business model are LOWER and more cost effective because of lack of a physical product. Wouldn't it be nice if product cost reflects this?
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Re: Re: Re: Do research
I'm going to assume that the Apple ITunes store, due to it's popularity has at a minimum, 2 OC48 connections, for redundancy. Now assuming those 2 OC48's are about $500K per month, that's $1million per month in Bandwidth costs alone. Now you have to look at the salaries of employees, server costs, building costs, utility costs, and all the other little red line marks on the books.
And with an estimate of $570million in gross profit, which may be a lot less, as this is just an estimate. You never know how much they really make, it could be a marginal profit, or a loss.
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Re: Re: Re: Re: Do research
This allows iTunes to physically host it's assets across the world securely, and have the bandwidth to see an overall net positive end user experience. However, this requires an increase in operational costs. If labels think Apple is merely printing money by moving data around, it's an oversight. As adoption grows, there are additional systems and costs that Apple has to cover to ensure their good name.
A key difference is that Apple pushes ownership of assets which is a free-market philosophy, and yes, it runs about-face to Radio and the other Per-Month music options. If you look at adoption numbers of iTunes versus other solutions on the market, it seems people are much more satisfied when they can own rather than rent.
It would be sad if people side with the rental option.
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Understand business
What you're saying, and what the article you linked to is saying, is that Apple charges $0.99 per song and pays $0.70 per song, for a $0.29 gain on each song.
However, that is not profit margin, unless you're going to argue that iTunes has zero administrative, bandwidth, programming, customer support, or marketing costs. It would be a stupid thing to argue, but you're kind of struggling with the basics here.
I very much doubt that Apple loses money on each song. I am willing to believe that their actual profit margin after real costs is in the range of zero to five cents per song.
I also believe that the $0.99 price point has huge psychological value, and moving to even $1.00 would hurt sales by more than the 1.01% increase would make up for. Moving to $1.09 would be even worse.
So, yeah, Apple doesn't lose money. But "profit margin" doesn't mean what you think it means, either.
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Re: Do research
Their markup is between 15 and 30% depending on who it's working with. But jumping from there to actual profit leaves out the cost of running iTunes, programming for iTunes, content acquisition, advertising, bandwidth, etc.
The profit margin is SIGNIFICANTLY less, down in the single digits, at most, and potentially break even to negative.
Why would they have 5 billion instances of loss leaders? That just seems like a poor business model.
If those 5 billion loss leaders help sell 160 million devices with huge margins, that's not a poor business model at all.
Assume that you lose a penny on ever song, but in turn it helps you sell a device with an average profit of just a $1. In that case, you'd want as many billions or even trillions of those loss leaders every day.
Their profit according to the article (which most of you will not click on and instantly try to discount my post) is about $.29
Um, but it's not. That assumes absolutely no costs involved with running iTunes. It's flat out wrong.
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Re: Do research
Loss leader can be a very lucrative business model.
Ask the printer companies what their margin is on the actual printer versus the margin on the replacement ink cartridges.
Retailers such as grocery stores and department stores use loss leaders to bring people into the store.
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That could only turn out good for consumers
So we will either save ourselves from the last bastion of DRM (on music...) or we will save ourselves from absurd and unwarranted cost increases on already absurd margin products.
This is a win or win for consumers.
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Re-Do Research
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Re: Re-Do Research
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The profit margin on ipods is much higher than itunes.
The number of ipods sold does not equal the number of people that currently carry ipods (some people upgrade, or sometimes they get damaged..lost..etc)
And remember...Itunes is only 5 years old. That's an average of 6 songs per user per year...not bad.
Once you buy an ipod and a bunch of songs off itunes...you're on the platform basically...most people (not the people on this forum...most people) will stick with the ipod to listen to their music after that.
people fear change.
itunes isn't going anywhere...it's just going to morph over time.
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Re:
Actually, I would say iTunes default audio format, MPEG4 Audio (AAC), is significantly better than MPEG1 Layer 3 Audio (MP3) on a technical level. Oh, and it has far fewer licensing costs as well. So its better that way too.
But I would agree that DRM on top of AAC is just plain evil.
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Re:
Apparently you haven't been reading. I've made it clear that I don't think iTunes selling music is sustainable long term. But, more to the point, as this very post pointed out (did you read it?), Apple's real business model is selling the hardware. That works for them even if the music is free.
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iTunes and mechanical licenses
Prior to downloads - this applied to a per track per disc cost depending on the length of the song.
The rate structure is set by Congress - yes, that same Congress and has a timeline with built-in increases.
Previous to this discussion, record labels always pay their own mechanical license fees. To suggest that Apple absorb the cost is to suggest a major change in the dynamics between labels and ANY store selling sound recordings.
Previously when rates to cover songs have increased, record labels absorbed it - the price of CDs does not rise due to an increase in mechanical royalties. They just stop recording music that they don't have any publishing rights to.
When selling digital content - the labels are making a larger percentage of profit - they don't have to press a disc and print inserts and then warehouse and ship them to different locations.
The split typically on iTunes with major labels is .70 going to the label - .29 to iTunes. I work with an independent download site www.austinmusicdownload.com and our clients/labels must pay their own mechanical licenses from the funds they receive. No different than iTunes or any store (Best Buy, Walmart, Frys etc) that sells physical CDs. Walmart is more inclined to tell labels how much it will retail for and what their split is rather than labels telling them that they must increase the retail price to absorb a larger mechanical fee.
To suggest that iTunes absorb the increase is a new dynamic and one that historically has no precedence of which I am aware. While it is tempting to rage against the huge international company that sells iPods, it is most likely a symbiotic relationship - music available to masses in exchange for helping fill up those little mp3 players.
So this would seem to be a tempest in a teapot. The labels would appear to have a "beef" with Congress and would perhaps want to someone else buy their dinner. They can always only record the music they own and never pay another dime in mechanicals.
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itunes are the biggest thief ever
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