Apple Threatens US iTunes Shutdown (and we care because?)

Yes, you read that right. Apple has today threatened to close US iTunes if the US Copyright Royalty Board (pictured) responds favourably today to a proposal from the National Music Publisher’s Association (NMPA) to increase the music store’s royalty payments by 66% (from 9 cents to 15 cents US).

Apple charges consumer 99 cents per track in the US market, and of this approximately 65-70 cents goes to the artists/record label, with about 9 cents of that going to Publishers owning the copyright. This leaves Apple with about a 30% Gross Margin before marketing, hosting and other costs are factored in. The proposed royalty payment increase would see that Gross Margin slashed to approximately 24%. Apple is claiming it cannot run a  profitable business at these levels, and while it may be true, this doesn’t seem to have stopped Amazon Music from thriving at a retail price of 89 cents per track on its most popular tunes.

Apple now finds itself between a rock and a hard place. The 99 cent price point is not only a beautifully round number for marketing purposes, but with major online competitors such as Amazon Music charging less, it’s difficult to see where the computer giant can go price-wise. They could try to push the 6 cent hike back into the Labels for and have them absorb any royalty hike, but this seems highly unlikely. Of course, rip-off Euopean readers will sigh in dismay at all this, given that prices in these markets have been inexplicably set at approx. USD1.40 per track since the outset.

According to Billboard, Apple generated USD1.9bn in revenue from iTunes in 2007 alone. Market Analysts Piper Jaffrey estimate that Apple will sell 2.4bn songs this year, which represents about 85% of the digital music market.

Rotten To The Core?
It’s been a pretty bad week for Apple’s music cash cow. What with the Norwegians weighing in, Amazon Music going international and BOTH Google and Amazon getting in on the iPhone action, you almost feel sorry for them. Almost.

I suppose the most amazing thing to come from all of this is not the ruthless, soulless approach Apple has taken in all of its music dealings, seemingly very happy to engage in dubious pricing practices, monopolistic behaviour and royalty penny-pinching. No, the really amazing thing is that consumers continue to use iTunes in droves despite having choice.

Or do they? The fact is, for your average Soccer Mom or Pre-Teen, once they’ve made their hardware decision (or more likely, Santa Clause made it for them in the form of an iPod stocking stuffer) they’re basically hard-wired into the iTunes ecosystem. You like the device, it works with your old MP3s, and there’s a very slick store for buying new stuff. Easy.

However, when consumers manage to peer beyond the edges of all those cool advertisements and it finally dawns on them that Apple has been taking them for a bit of a musical ride with their DRM/AAC quagmire, they find that it’s actually not that easy to suddenly switch to Amazon Music, for example, and to set up new folders and start flowing music into the iPod. What else could explain Apple’s continuing dominance in a market in which it continues to bully, intimidate and basically waltz around the shop like it owns the place (which it kinda does).

Well, Apple’s chickens are coming home to roost, it seems, and it may finally be time for them to pay the piper. And yes, by that I do mean via increased royalties to Jethro Tull and Highland Marching Bands everywhere.

Other readers also read:

Apple Moves Toward Music As Service

Lala Land: How Apple’s Deal Gives It A Leg-Up To The Cloud

SellaBand To “Bring The Noise” To The States

Related posts:

1. Norway Takes The Fight To iTunes
2. One Major Label Takes On The Dominance Of iTunes
3. Big sales without iTunes?
4. Happy Days! Amazon Confirms UK Launch

Posted by Chris McLellan on Oct 2 2008. Filed under Business Models, Digital, Gadget & Services, Wide Angle. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry