Federal copyright board to set music royalties

October 1, 2008 6:46:48 PM PDT
Royalties that digital music companies from Apple Inc. to record labels pay songwriters for selling their music as ringtones, CDs and permanent digital downloads are to be set Thursday by a federal agency. This is the first time in nearly three decades that the industry has been unable to decide the fee for sales of recorded music on its own.

Apple has so strongly opposed increasing the rate, now 9.1 cents per song, that it threatened to shut down the iTunes store if the rate goes up - a move experts said was unlikely.

More likely is the Copyright Royalty Board hiking the rate incrementally, in line with the fraction of a penny that it has risen every two or three years since 1981, when it was 4 cents per song.

"Everybody expects it to go up somewhat but nobody expects it to go up all that much," said Steve Gordon, an entertainment attorney and author of "The Future of the Music Business."

"The record business has a lot of problems. This is not going to make it much better or much worse," he said.

The last time the government had a hearing to set the so-called mechanical royalty rate was in 1980, which was triggered by a change in federal law.

The decision expected Thursday caps proceedings that began in January. Part of the current disagreement stems from the rise of digital downloads - driven by Apple's iTunes store - which had never been treated separately from CD sales, which are plummeting.

"For the last seven years, we've been fighting over those business models," said David Israelite, chief executive of the National Music Publishers' Association, which is representing songwriters and their publishers in the copyright board proceeding.

Digital downloads grew 38 percent from 2006 to 2007 to become a $1.26 billion business, making up 23 percent of the market for recorded music, according to the Recording Industry Association of America. Sales of physical music media such as CDs, cassettes and DVDs declined 19.1 percent to $7.5 billion in the same one-year period.

Most industry players, including Warner Music Group Corp.'s chief executive, Edgar Bronfman Jr., expect digital sales to eventually surpass CD sales, which would drive the market higher for the first time since 2004.

In a deal reached last week, industry players agreed to pay songwriters and their publishing agents 10.5 percent of all revenue made from interactive streams and limited downloads offered by subscription services like Rhapsody and Napster - minus roughly 5 percent paid in performance royalties.

The copyright rate for CDs, ringtones and permanent digital downloads remained unresolved partly because they accounted for far more in sales - some $9.1 billion, or about 90 percent of the music business, according to the RIAA.

Writing to the board last year, Apple's vice president of iTunes, Eddy Cue, argued that the store's price of 99 cents per song was not flexible so raising the royalty could jeopardize the iTunes store's profitability.

"If (the iTunes store) were forced simply to absorb any increase in its mechanical royalty rate, the result would be to significantly increase the likelihood of the store operating at a financial loss," Cue said.

"Apple has repeatedly made clear that it is in this business to make money and most likely would not continue to operate (the iTunes store) if it were no longer possible to do so profitably."

Apple contended that it can't raise iTunes prices to compensate for higher royalties because the store is competing with pirated music available for free.


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