Apple Threatened To Close iTunes If Royalties Were Raised?

from the empty-threats dept

Wed, Oct 1st 2008 7:03am — Mike Masnick

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.

Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis.

While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.

–The Techdirt Team

Filed Under: copyright, itunes, loss leader, royalties
Companies: apple

43 Comments

If you liked this post, you may also be interested in...

Reader Comments

Subscribe: RSS

View by: Time | Thread

SteveD, 1 Oct 2008 @ 7:28am

Its not much of a threat. I'm sure the big labels would love itunes to disappear and be replaced with retailers they have more control over.
[ link to this | view in thread ]
Consider, 1 Oct 2008 @ 7:35am

If iTunes store shut down I don't see people going out and buying CDs. There are still too many ways to get the music free. iTunes helps honest people be honest, but if they see their efforts thwarted by music industry greed, I don't see a lot of them going out and buying entire CDs just to get the songs they want.

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.
[ link to this | view in thread ]
ulle, 1 Oct 2008 @ 7:35am

If Apple handled this right it could be major PR move in favor of Apple, imagine the backlash that would happen when suddenly people were cut off from their music, not the tech-wise who could easily find other sources, but the average masses that are not very tech savy, people like vice president-candidates children or senators children or spouces. This really could get interesting especially if Apple does a good job of painting the music industry as money grubbing bad guys.
[ link to this | view in thread ]
Aaron Ortiz, 1 Oct 2008 @ 7:46am

Hear, hear!
Ulle is right...but Apple is bluffing of course.
[ link to this | view in thread ]
Surfhippy, 1 Oct 2008 @ 7:47am

I would love to see them pull the plug. It would probably backfire but it would be nice to see companies pushing for the raise to the royalties get nothing for there efforts.
[ link to this | view in thread ]
Anonymous Coward #42, 1 Oct 2008 @ 7:52am

If this happens, either Apple will be forced to raise their prices in the iTunes store, or they will do as they say and shut it down. Either way, that may drive some to start downloading the free stuff again, so the royalty increase would actually help encourage piracy.

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.
[ link to this | view in thread ]
Ima Fish, 1 Oct 2008 @ 7:56am

I just wanted to point out, that the 5 billion songs Apple sold via iTunes is not all that impressive. Apple has also sold 160 million iPods. That's less than 32 songs per iPod.

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.
[ link to this | view in thread ]
PRMan, 1 Oct 2008 @ 8:00am

Amazon?
Amazon would love that. They could raise their prices to $1.29 and make a killing since their system also puts the music seamlessly on the iPod.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 8:12am

Do research
Yeah right that is a loss litter. Their markup is 30%. It is well documented. Your "proof" (aka your own blog) is from 2003. Apple says they are in the business of making money. Why would they have 5 billion instances of loss leaders? That just seems like a poor business model.

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
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 8:20am

Re: Do research
*profit margin*
Sorry
[ link to this | view in thread ]
Gears of Peace, 1 Oct 2008 @ 8:22am

Re:
Uh, "not all that impressive" compared to what?

Selling 5 billion of ANYTHING at $1/shot is pretty fucking impressive, I'd say.
[ link to this | view in thread ]
some old guy, 1 Oct 2008 @ 8:30am

That could only turn out good for consumers
Either way, this can only result in a net benefit to consumers. Right now, iTunes is the #1 music retailer worldwide. It's also STILL using DRM as three of the big four labels are refusing to allow Apple to sell music without DRM. DRM is very anti-consumer. Raising rates on the medium of choice of consumers from its already OBESELY FAT margins to even DEATHLY OBESE margin levels (for the labels, mind you, not for the retailers) is also very-anti-consumer.

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.
[ link to this | view in thread ]
KJ, 1 Oct 2008 @ 8:30am

Re: Do research
As an indie artist I get between $.70 and $.89 per song I sell on itunes(it varies based on where the song was sold and the currency exchange rates at the time) - I'm pretty sure the majors aren't making less.

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.
[ link to this | view in thread ]
coolridge, 1 Oct 2008 @ 8:33am

Re-Do Research
The "article" quoted in Post #9 is not an article at all but is also a blog on the Wired network of blogs. The report of 30% profits is unsubstantiated and it even states that right there in the written text. So, only point that I have is that if you are going to be self-righteous and antagonistic about doing research, then you might want to consider taking a remedial comprehensive reading course first.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 8:35am

Re: Re-Do Research
So, you are going to tell me I am wrong without doing research. Clever.
[ link to this | view in thread ]
Wrong, 1 Oct 2008 @ 8:36am

Re: Do research
Just because a product is marked up by certain % does not mean that it is making money. The cost of iTunes is a lot more than jsut the cost of goods. Every product on the face of the earth is marked up. That mark up is intended to cover overhead and other operating costs; i.e. salaries of employees, bandwidth, hardware etc. And hopefully, after you have paid all of that then there is a profit. Regardless, it is entirely possible that Apple is operating it's iTunes division at a loss or at very thin profits. Selling iPods and iPhones and all ofther things "i" are more important to Apple and that is where their profit lies. You have to look past jsut the simple cost of goods. Until we understand exactly how Apple operates iTunes and all that goes with it, that 30% doesn't mean anything.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 8:37am

Re: Re: Do research
Wait, I thought digital music was an infinite good. It shouldn't cost them anything. Oops.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 8:39am

so a couple of points:

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.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 8:40am

Re: Re: Do research
But you are still forgetting about that $570 million they made last year.
570 million
[ link to this | view in thread ]
Stupid comment, 1 Oct 2008 @ 8:43am

Re: Re: Re: Do research
"It shouldn't cost them anything"
For the people who produce it. The people who resell it still have to pay royalties under the current business model.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 8:56am

Re: Re: Re: Do research
I haven't forgotten anything. Point is that it is entirely possible that Apple is operating iTunes at a loss. I personally have no idea if iTunes turns a profit or not. But you can't just look at number of units sold and cost of goods and then determine that they are making money.
[ link to this | view in thread ]
CVPunk, 1 Oct 2008 @ 8:59am

Re:
"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."

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.)
[ link to this | view in thread ]
Jed, 1 Oct 2008 @ 9:03am

Re: Not a Threat
I doubt that very much. When people think of downloading music they think of iTunes. When they are forced to switch people will have to search around. Which will almost definitely mean more TPB users.
[ link to this | view in thread ]
Anonymous Coward #42, 1 Oct 2008 @ 9:14am

Re: Re:
I know, I've done that myself for the two or three songs I actually bought through iTunes (what can I say, it was convenient). But I'm willing to bet the vast majority of iTunes users wouldn't have a clue how to do it, and will be slamming Apple to no end unless they produce some sort of utility to un-DRM their songs.

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.....
[ link to this | view in thread ]
John, 1 Oct 2008 @ 9:16am

Let Apple rot. iTunes, iPod... blah!! mp3 is far better.
[ link to this | view in thread ]
Brooks, 1 Oct 2008 @ 9:36am

Understand business
For someone who posts with such an aggressive and defensive tone, you didn't really vet your own points very well.

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.
[ link to this | view in thread ]
Brooks, 1 Oct 2008 @ 9:39am

Re: Re: Re: Do research
That $570m figure is from Billboard, not Apple. And it's a "calculation", apparently based on simplistic assumptions (like iTunes having zero SG&A costs).

You can argue anything you want if you get to make up the numbers.
[ link to this | view in thread ]
some old guy, 1 Oct 2008 @ 9:42am

Re:
Let Apple rot. iTunes, iPod... blah!! mp3 is far better.

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.
[ link to this | view in thread ]
Mike (profile), 1 Oct 2008 @ 9:59am

Re: Do research
Their markup is 30%

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.
[ link to this | view in thread ]
Brooks, 1 Oct 2008 @ 10:13am

Re: Re: Re: Do research
Back to school for you. The bits themselves are an infinite good. Organization and delivery of the bits is a value-added service, and there are administrative costs associated with reselling goods, whether finite or not, when royalties and corporate stuff is involved.

Good that you're trying to get educated, though!
[ link to this | view in thread ]
Brooks, 1 Oct 2008 @ 10:22am

Re: Re: Re-Do Research
You don't have to be all that clever or do any research at all to notice that the article completely ignores SG&A costs.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 10:25am

Re: Re: Re: Do research
But you are still forgetting about that $570 million they made last year.
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?
[ link to this | view in thread ]
Vincent Clement, 1 Oct 2008 @ 10:52am

Re:
Ask NBC how their boycott of iTunes worked out.
[ link to this | view in thread ]
Monarch, 1 Oct 2008 @ 10:53am

Re: Re: Re: Do research
Bandwidth is not free.
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.
[ link to this | view in thread ]
Vincent Clement, 1 Oct 2008 @ 10:59am

Re: Do research
That just seems like a poor business model.

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.
[ link to this | view in thread ]
chris (profile), 1 Oct 2008 @ 12:02pm

Re:
I just wanted to point out, that the 5 billion songs Apple sold via iTunes is not all that impressive. Apple has also sold 160 million iPods. That's less than 32 songs per iPod.

at 99 cents a track it's like $10,000 to fill a 40gb ipod, 32 songs per ipod sounds pretty generous actually.
[ link to this | view in thread ]
Nick Stamoulis, 1 Oct 2008 @ 12:03pm

yeah I highly doubt they will shut down iTunes. It's most likely a threat with no real backing. However, as one commenter stated, I think labels and some musicians would prefer them to be longer existent.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 1:40pm

Re: Re: Re: Re: Do research
True. Most recently, I found that iTunes seems to be leveraging Akamai's EdgeSuite Digital Asset Management system.

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.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 4:27pm

Apple's success is in its iPod. iTunes is used to manage the iPods music database. The annoying thing about iTunes is that it leans more towards purchasing from the Apple store and doesn't allow you to copy songs from another iPod if there not in your library. The majors should be happy about this. But if Apple decides it's not profitable to operate the store, they can simply shut it down and rewrite iTunes to make it much friendlier to download from P2P directly onto the iPod. Apple would still profit from iPod sales but the music industry would wish that they never caused this to happen.
[ link to this | view in thread ]
Anonymous Coward, 1 Oct 2008 @ 5:50pm

why is it ok for apple to sell digital music but not for the rest of the world, which must give away music free and make money elsewhere?
[ link to this | view in thread ]
Mike (profile), 1 Oct 2008 @ 11:43pm

Re:
why is it ok for apple to sell digital music but not for the rest of the world, which must give away music free and make money elsewhere?

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.
[ link to this | view in thread ]
Carolyn H., 4 Oct 2008 @ 12:22pm

iTunes and mechanical licenses
If we can get to the basics- mechanical license fees are due on songs released on labels whose publishing arm does not own the publishing. The money goes to the song writer or to the person who the song writer sold it to - and is usually split with a publishing company. Often major labels only record music in their catalog which means they can waive paying themselves. Its when they record the music in someone else's catalog where these fees typically are a factor.

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.
[ link to this | view in thread ]
sue, 1 Oct 2010 @ 12:31pm

itunes are the biggest thief ever
first i don,t like itunes becouse it belong to apple and apple made itunes so he can steal the money that should be going to those artist and not to the bank accound of the president of apple so yes i hope itunes disapear for good.i am a old fashion i rather buy a whole album then buy just one song and give itunes more money.this itunes is breaking up the music industry what right itunes got to not give the records label the % they ask? what right itunes got to take in half of the money that should be going to those artist who work day and nights in the studio to make an album.no its not oke.the records label spend ton of money to promote their artist and when that artist make it big they think that they would get their share back it is not the case becouse half of the income when to apple.it is not fair.
[ link to this | view in thread ]