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in Filmmaking
on Oct 2, 2008

The Fortune article entitled “Digital Music Showdown” is linked all over the web today as it contains a seemingly bombshell-like piece of news: that Apple is threatening to shutter the iTunes music store over the Copyright Royalty Board in Washington, D.C.’s proposal to increase the royalty rates for digitally-sold music by six cents a song. The story is grabber, and it grabbed me — I playfully lifted a page from Keith Olberman to protest what I called Apple’s “preposterous piece of brinksmanship.”

Of course, the devil is always in the details, and as a number of posters to the original thread pointed out, the situation is a bit more complicated. Detail Number One has to do with the original Fortune story, which CNET New discusses here:

Apple did indeed say that if it couldn’t make a profit, it “most likely” will not continue to operate iTunes….

Fortune magazine published a bombshell of a story on Tuesday by reporting that Apple once threatened to close iTunes if forced to pay more for music royalties. A more careful reading of the statement from an Apple executive shows that it was more of a veiled threat. Regardless, it’s possible Apple could shut down iTunes.

But is it likely? No.

First, the comment was made by Eddy Cue, vice president in charge of Apple’s iTunes Store, in a written statement to the Copyright Royalty Board sometime before April 2007….

Cue’s comment that the company has “repeatedly made clear” is something else to look at closely. I can’t find another example where Apple has said it will shut down iTunes. Two music industry sources told me that at no time have iTunes’ representatives made such a statement to the record labels–not in negotiations, not in passing, never.

So is the Fortune story just a case of yoking a year-plus-old statement to an obscure current administrative event to ramp up page hits? Maybe… and maybe not. Again, from Greg Sandoval’s CNET piece:

I have to question why it has taken 18 months for Cue’s comments to come to light, and why they’re popping up just two days before the board is scheduled to rule on a possible rate hike?

Maybe it’s coincidence. Or maybe Apple is firing a public-relations shot across the bow of the music industry and CRB. When it comes down to mass appeal, Apple holds all the cards. If word gets out that music publishers are trying to stick it to consumers, and Apple is fighting to keep prices down on their behalf, well, there’s liable to be public backlash against the record industry. If this thing follows the normal course, there would be calls for boycotts, protests, and so on.

The reason this story is of interest to me — aside from the fact that I am an Apple customer, am typing this on a Macbook and have a huge iTunes library — is that issues of artist royalties in the digital space are big ones in the film world right now. (To the Anonymous poster on the thread below — I used the word “artists,” not “filmmakers,” and am assuming that this readership understands how a royalty arrangement reached on behalf of musicians might be instructive for filmmakers to know about too.) Not being in the music business, I tend to think of “artist royalties” as the one thing that flows straight back to the artists. However, as this article on Free Advice points out, royalty payments are not so simple:

Before the artist/songwriter eventually receives their “reduced” US mechanical royalties, there are numerous withholdings by the recording company pursuant to the artist’s recording contract. There are frequently several clauses that give away “freebies” and eat away at the artist’s basic royalty rate (e.g., getting paid on less than 100% of units sold, receiving no royalties for “free goods” or promotional CDs, or for “non-controlled” songs, getting a lower royalty rate for CD’s, cassettes, and record club or budget records, giving free licenses for promotional music videos, etc).

So yes, this should be considered as much of a battle between the record companies and Apple, the Fortune story may be overblown, and, depending on how today’s ruling goes, this could all be a moot point. I still think the Apple threat, whether it was yesterday or a year ago is kind of preposterous. The issue for Apple as a company is not only the pricing of its digital media but also the revenues generated by the sale of hardware designed to play that digital media. But if there’s one thing that the Fortune article has done its bring to the forefront this whole discussion of digital royalties, like this argument proposed by Erick Schonfeld in the Washington Post:

On its face, it looks like Apple and the record companies are once again trying to stick it to the little guy (artists, song writers, and other music publishers). But in this case, Apple and the recording industry are actually right. Music on the Web is currently crippled by the fees set by the Copyright Royalty Board (not just for downloads, but for streaming Internet radio as well). As it is, Apple pays 70 cents from each track sold to the record companies (which then pay the music publishers their cut). There is not much margin left out of which to take that extra 6 cents, and charging $1.05 per track will have an impact on sales.

Moving to a revenue-sharing model makes a lot more economic sense. That way digital music sales has more breathing room to establish itself, and the artists will be able to grow with the industry. Eight percent of a bigger pie is better than nine percent of a smaller one. Rather than focus on how much each publisher gets per track, the Copyright Royalty Board should try to maximize the total amount of fees that publishers will get. A rev-share model is the way to go.

The Copyright Royalty Board rules today, and given the press attention this has gotten I’m sure there will be an Apple response. Stay tuned.

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