iTunes Might Become Slightly Less Profitable

Lucas Jensen | October 2, 2008 10:30 am

In truth, iTunes only accounts for 5% of Apple’s revenue, but we all know that it’s really there as a Trojan horse to get people to buy iPods/iPhones, equate Apple with more than just computers, and make people buy the wrong versions of songs. Today, that small chunk of income for Apple may become even smalller, as a panel of appointed judges called the Copyright Royalty Board (snooze alert of a name, guys!) will rule as to whether digital music retailers like iTunes, Amazon, and Rhapsody will have to pay larger royalties to music publishers.

Publishers currently receive 9.1 cents per 99-cent download, which is as arbitrary a figure as lawyers could come up with. (All of the 9s do look rather nice together.) Publishers are trying to raise it to the much-better-sounding 15 cents per 99 cent download, in part because the ease of digital distribution doesn’t incur costs to retailers the way physical distro does. Although on the flip side, it could be argued that digital downloads are also relatively cheap (certainly as far as whole album prices go) in comparison to CDs. Regardless, Apple has said that it’s sticking with its 99 cent price structure, even rattling a saber here and there. This is from a BusinessWeek article on the subject:

During a 10-month trial that concluded earlier this year, Apple executive Eddy Cue claimed that a rate increase could narrow already thin margins and that the company “would not continue to operate [the iTunes Music Store] if it were no longer possible to do so profitably.” The testimony fueled worry that iTunes, whose downloads have helped drive sales of iPods and iPhones, would shut down or drastically change its business model if a royalty increase comes down the pike.

Does anybody actually believe that this would happen? And can you believe the RIAA, wanting to lower the royalty rate to 4 cents? Have they no hearts? Wait. Don’t answer that.

Ultimately, Apple is probably locked into its pricing structure no matter what happens:

“If the price is too high, everyone is going to go the other way, which is free,” says Daniel Ernst, an analyst at Soleil-Hudson Square Research.

At least somebody gets it!

The Copyright Royalty Board will announce its decision later today.

Music Downloads: Is the Price Right? [Businessweek]