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Apple defeats music rate hike

Judges rule against steep royalty increase for online music stores.

By Devin Leonard, senior writer
October 2, 2008: 6:10 PM ET

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NEW YORK (Fortune) -- It looks like Apple won't be closing the iTunes store because of a dispute with music publishers over royalties on downloaded songs.

The Copyright Royalty Board in Washington, D.C., today declined a request by the National Music Publishers Association to increase royalties from 9 cents to 15 cents on songs purchased from online music stores like iTunes.

Apple adamantly opposed the proposed 66% increase and threatened to shutter iTunes if it was approved. In a statement submitted to the board last year, iTunes vice president Eddy Cue said Apple didn't want to raise its 99 cents a song price or absorb the higher royalty costs itself.

Cue's statement was first reported by Fortune on Tuesday.

PricewaterhouseCoopers estimates that Apple (AAPLE) only makes about 10 cents a song in profit.

Apple spokesman Tom Neumayr said the company was happy with the ruling. "We're pleased with the CRB's decision to keep royalty rates stable," he said.

The Copyright Royalty Board is a three-judge panel that oversees statutory licenses granted under federal copyright law. That includes royalty rates for music sales. The current case followed the expiration last year of a 1997 decision that had governed sales of so-called physical music products like CDs for a decade. Thursday's decision will set royalty rates for the next five years.This is the board's first ruling on the digital sale of music.

Cue's threat was greeted with disbelief by many people in the technology world Apple has artfully used the iTunes store to spur demand for iPods, its most popular product. Before Apple opened the store in 2003, there was virtually no place for iPod owners to purchase music online. And so iTunes helped grow the market for the gadget by appealing to people who didn't want to patronize illegal file-sharing services and risk a music industry lawsuit.

iTunes ended up as the largest music retailer on the Internet. Piper Jaffray estimates that Apple will sell 2.4 billion songs this year, giving it an 85% share of the digital music market.

But the company's aggressive position in this case illustrates the challenges faced by the nascent digital music industry. The Recording Industry Association of America says sales of digital songs and albums rose 46% last year, to $1.2 billion. Apple laments that its profits are still slim. Therefore, Apple argues, it would be dangerous to raise its 99-cents-a-song price.

Apple pays an estimated 70 cents on the sale of every dollar it collects per song to the record companies responsible for each track. The record companies turn over 9 cents to the music publishers who control the copyrights to these tunes.

The record companies were in no mood to pay the proposed royalty increase out of their pockets. Not when CD sales, their one-time cash cow, fell last year by 20%, to $7.4 billion. They asked the Copyright Royalty Board to abandon the fixed per-song payment in favor of 8% of wholesales revenues..

"We're pleased that this decision freezes the current rate for CDs and digital downloads for the five-year term," said RIAA chairman Mitch Bainwol in a statement."No party got everything it wanted, yet at the end of the day, the certainty provided by this ruling is beneficial."

The Digital Media Association, which represents Apple and other online music services, sought an even lower rate of 4.8 cents a track, or 6% of "applicable revenues .They didn't get what they wanted. But executive director Jonathan Potter also sounded relieved on Thursday. "During this challenging time for the music industry and digital stores and services, we are pleased with the CRB's decision to keep royalty rates stable for the next five years," he said in a statement.

The music publishers had argued that Apple was selling songs at a low price to sell iPods, which didn't benefit them. Even so, they, too sounded a conciliatory note in a statement released after the ruling was announced.

"These events will bring clarity and order to an environment that for the past decade has been hampered by litigation and uncertainty on all sides," said David Israelite, CEO of the National Music Publishers Association.

"I think, all in all, there's not a lot of drama here, just a good set of rates that will serve songwriters well and work well for the purveyors of digital music," said Roger Faxon, CEO of EMI Music Publishing, one of the world's leading music publishers.  To top of page

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