Apple Threatens to Shut Down iTunes Over Royalties

Posted on October 2, 2008 at 10:45 am (PST)

Apple has said it will shut down iTunes if song royalties increase. The Copyright Royalties Board (CRB) will meet today to decide on a request by major music labels to increase song royalties form 9 to 15 cents per song.

In the recently released testimony by Apple vice president Eddy Cue to the Board at the Library of Congress in April 2007, Mr. Cue tersely stated:

"If iTS (iTunes Store) were forced to absorb any increase in the mechanical royalty rates, the result would be to significantly increase the likelihood of the store operating at a financial loss - which is no alternative at all. Apple has repeatedly made clear that it is in this business to make money, and would most likely not continue to operate iTunes if it were no longer possible to do so profitably."

The Recording Industry Association of America, who works closely with the NMPA cited that digital sales rose 46% last year to $1.2 billion. Apple already pays approximately 70 percent of its track revenue to music labels. If royalties increase from 9 to 15 cents per track, it would be a 66 percent royalty increase.

CNET’s Greg Sandoval commented on the document’s curiously timed appearance on the eve of the rate increase decision, stating:

"When it comes down to mass appeal, Apple holds all the cards. If word gets out that music publishers are trying to stick it to consumers, and Apple is fighting to keep prices down on their behalf, well, there’s liable to be public backlash against the labels. If this thing follows the normal course, there would be calls for boycotts, protests and so on."

Apple current controls 85 percent of the online music market and is set to sell 2.4 billion tracks this year, according to Piper Jaffray.

If the royalty rate increase goes forward, the National Music Publishers’ Association (NMPA) could face a steep decline in music sales if iTunes shuts down, and a resugence in illegal music sharing like back in the days of Napster.