Music industry braced for digital ruling
By Andrew Edgecliffe-Johnson in New York and Kevin Allison in San Francisco
Published: October 1 2008 19:42 | Last updated: October 1 2008 19:42

Three Washington judges are due to decide Thursday how the spoils of the digital music boom should be shared, in a ruling with implications for songwriters, music publishers and online services such as Apple’s iTunes store.

The judges will settle a dispute about the “mechanical” royalties publishers earn from digital downloads, mobile phone ringtones and compact discs.

At the start of the decade, as legal sites such as iTunes and eMusic emerged to challenge the peer-to-peer services that had undercut traditional music revenues, they adopted the rate of 9.1 US cents per track that already existed for compact discs.

Publishers represented by the National Music Publishers’ Association are now pressing for that to be raised to 15 cents, while DiMA, the digital music association, is pushing for a cut to 4.8 cents, to reflect pressure on the prices its members can charge while piracy remains rampant.

The judgment could herald a more profitable business model for the winning side. Depending on who loses, however, it could further undermine the struggling music industry or endanger innovative digital start-ups. The sums at stake are large: An increase to 15 cents, while unlikely to apply retrospectively, would equate to $300m for the 5bn tracks that Apple had sold through the iTunes store by June this year.

Apple is widely considered to command between 75 per cent and 85 per cent of the US digital market. The computer-maker says that iTunes is now larger than any other music retailer in the US, traditional or digital.

On Wednesday, both sides of the debate were reluctant to comment on their expectations for Thursday’s announcement by the Copyright Royalty Board, but made clear that it represented the most significant decision to date in the fight over the economics of digital music.

“Songwriters who are struggling to make a living creating their art are looking for fair compensation, and this decision will determine whether the American songwriter can survive,” David Israelite, president and chief executive of the NMPA, told the FT.

One publisher, who would not be named, added: “Historically, the CRB has never reduced a rate. We hope they’ll either keep it the same or increase it.”

Digital music groups are adamantly opposed, however. Eddy Cue, vice-president of iTunes, told the board last year that Apple might have to close the download store if the judgment went against it.

“It would be a pretty major move,” said Andrew Hargreaves, an analyst at Pacific Crest Securities, who estimates that Apple has made about $500m in profits from iTunes over the past 12 months. “My guess would be that it’s hyperbole.”

The risk for the music industry, however, is that – in spite of incursions by Amazon, Wal-Mart and MySpace – Apple remains their biggest partner in the digital business on which they are relying for growth.

“If they weren’t there, the number of people that would go to alternative [paid download sites] would be overwhelmed by the number of people who would go to file-sharing sites,” said Mr Hargreaves. “The music industry as a whole would be out several billion dollars.”

From the article: ....Andrew Hargreaves, an analyst at Pacific Crest Securities, who estimates that Apple has made about $500m in profits from iTunes over the past 12 months. “My guess would be that it’s hyperbole.”

Wow! He thinks Apple made $500m in profits from iTunes in a year.

Let's see, iTunes tracks sell at a fixed rate of 99 cents a pop.

It has been established that the labels take about 69 cents per track, which leaves 30 cents per track for Apple.

For argument's sake, let's just assume that Apples other costs for iTunes are zero (even though we know they aren't -- there's the cost for maintaining and upgrading the software, credit card fees, etc., etc., etc.).

That would mean in order for Apple to make $500m in profit in the last year, at 30 cents "profit" per track, they would have needed to sell 1.67 billion track in the last 12 months alone. Considering they've only sold 5 billion tracks in the entire time iTunes has been around, I think that's a bit off the mark.

My guess would be that Mr Hargreaves is quite familiar with hyperbole.