Tuesday, October 21, 2008

Applel threatens to shut down iTunes

We've been following a developing story between music publishers, the Copyright Royalty Board, record companies, and Apple the past several weeks. What caught our attention is that Apple threatened to shut down iTunes over the fight. Wow! In question is the rate that record companies must pay songwriters and music publishers for digital recordings that are sold by download. Specifically, the NMPA asked the CRB to raise the mechanical royalty rate paid to them from the record labels by 66%. (Acronyms and explanations are below…)

The move comes as part of music publishers' drive to start collecting mechanical royalties for compositions on digital records sold online. This marks the first time a mechanical royalty rate has been set for music sold by digital download. (Mechanical royalties are copyright royalties for musical compositions written by songwriters and used in recordings.)
The characters in this drama are:

  • CRB (government)
  • NMPA (music publishers)
  • RIAA (record labels)
  • DiMA (e.g., iTunes) – INTERESTED PARTY
  • ASCAP ( represents songwriters for radio, tv and internet use (streaming) of songs) – INTERESTED PARTY

What do the acronyms mean?

  • NMPA – National Music Publishers Association (music publishers)
  • ASCAP – American Society of Composers, Authors, and Publishers (composers and songwriters)
  • RIAA – Recording Industry of America (record labels, e.g. Warner)
  • DiMA – Digital Media Association (Apple/iTunes, Amazon, BestBuy, etc.)
  • CRB – Copyright Royalty Board (government regulatory board)

Putting these players into context and sadly over-simplifying things a tad…

  • Songwriters – individuals who write music and/or lyrics to musical compositions
  • Music Publishers – companies that license those songs to record labels
  • Record Labels – record labels who produce and/or distribute recordings using those songs

Who is fighting for what…

  • NMPA wants higher mechanical royalties so that songwriters can earn more
  • Record Labels (through RIAA) want to keep mechanical royalties low so they don’t have to pay as much to songwriters to protect margins
  • DiMA is fighting against any mechanical royalties for digital downloads of music because eventually those royalties will affect how much additional money the music labels will want from the digital retailers to make up for their increased costs.

Apple threatens to shut down iTunes

In a somewhat surprising move, Apple—not a direct party to this matter -- threatened to shut down iTunes if the CRB imposed mechanical royalty rates.

What the CRB decided

Rates for physical recordings, e.g., CDs, will stay the same, 6.1 cents per song, under a decision handed down Thursday by the Copyright Royalty Board (CRB), which rejected the NMPA petition for a 66% rate hike. Rates for digital downloads of recordings will be the same as for physical recordings. The decision came after Apple sent a letter to the CRB that it might have to close iTunes down should it have to pay record labels money to cover the music labels’ costs for musical compositions. Apple claimed that the new rate for digital records would make the iTunes store unprofitable.

(The truth of the matter is that the increased cost to record labels – and thus to Apple – is relatively small so this claim seems rather weak. Also, most record companies, through contract, end up paying much less than the CRB rate, i.e., much less than 61 cents per song. )

What this means

Nonetheless, we have to ask to what extent did Apple’s letter claiming dire circumstances influence the CRB’s decision? We don’t know, but Apple is a very powerful player in the digital industry. Assuming that Apple – or other large market players -- can and will wield the same type of influence over the book industry, what should book publishers learn from this?
The influence of large industry players (the proverbial 800-pound gorilla) is something to always keep in mind. That kind of influence should prompt book publishers to grow their distribution portfolio to protect against companies with monopolies or near monopolies. We should be building direct B2C relationships, broadening our digital library (public and academic) distribution channels, and distributing more content to more digital content resellers. We need to build and cultivate many channels -- even if individual channels are small, the sum of the many parts will give us economic stability and more protection from monopolies, give consumers greater choices, and give our authors broader reach.

We need to consider alternative forms for distribution, such as, but limited to:

  1. DRM free/watermarked files, which will allow consumers to move content to any device, thereby freeing them to shop at many different locations, thus allowing for many different retailers to flourish. (Publishers should still monitor P2P networks and fight online piracy though).
  2. Develop and/or encourage interoperable reading platforms that allow consumers to share content with family and friends. (Some sort of DRM would have to be created that tracked how many times the owner of the file could lend the file, but we shouldn’t restrict the owner on how many and what devices content can be consumed on).
  3. Develop enriched content only available through the publisher which will build direct B2C relationships and add new sales/distribution channel.

These are just a few ideas and we don’t want to lose sight of all the good things that Apple and iTunes have done. They have made a better mouse trap and they should be given credit for that, but that does not mean we shouldn’t be mindful that we, the content publisher, may get caught in that trap…

1 comment:

Jon Ellis said...

This is the first that I've heard of the move by Apple. I suppose that we all want to believe that Apple is the crunchy, good-hearted, altruistic, player in the digital world, and I suppose that at some level they are, but only in relationship to Microsoft... Beyond that, given that such a power move could at some point in the future be made in the publishing world, this might be the time for publishers to step up and begin offering branded versions of digital readers with compelling advanced-featured access to books, magazines, newspapers, etc. Would I be interested in buying a Kindle branded by Hachette at a reduced cost (in much the way that I bought my cell-phone from Verizon). Of course I would. Would I then continue to purchase books directly from the source - at a discounted price. The answer is obvious.
I would suggest that the publishing industry could make the same sorts of deals with electronics giants like Sony that would be of benefit to everyone involved - including the customer.