Apple Won't Unplug iTunes

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The digital music scene could have gotten hairy, if not for yesterday's move by the Copyright Royalty Board to freeze mechanical royalties. If the rates payable to publishers and songwriters got bumped higher than the current $0.091 a track, Apple (Nasdaq: AAPL  ) even threatened to close down its iTunes Music Store.

Would Apple really have shuttered its store if it had to pay music makers just a few pennies more?

I don't believe it, and you shouldn't, either.

I understand the urgency of maintaining that $0.99-a-track price point. The iTunes Store works on razor-thin margins, with bandwidth and transaction fees nibbling at the scraps that record companies leave behind. If Apple had to pass on additional royalty costs to consumers, $1.05 a track -- or $10.50 for a digital CD -- just wouldn't have the same kind of pricing zing.

But Apple obviously doesn't have to make monster profits through iTunes. The store is there to protect its iPod empire. If Apple were to ridiculously shut down its store in protest, it would send its avid base of music fans to rival sellers like (Nasdaq: AMZN  ) and Wal-Mart (NYSE: WMT  ) , which have switched to MP3 music that works on all portable music players. Apple would never let that happen.

In short, Apple was just calling the music industry's bluff. It worked. I guess the fact that pirates have also frozen their mechanical royalties on peer-to-peer downloads -- at $0.000 a track -- was an effective deterrent. The industry has chosen to keep the leader in legal digital music distribution happy, and rightfully so. Can you imagine the mess that the music industry would be in if Apple hadn't made it hip to actually pay for online music files?

Downloading isn't the only game in town, of course. Labels and service providers will naturally trade barbs over the many other ways that music is consumed on the Web. Music subscription services like Napster (Nasdaq: NAPS  ) and RealNetworks' (Nasdaq: RNWK  ) Rhapsody abide by a different set of standards, since they simply serve up temporary streams through their all-you-can-listen-to buffet models. Internet radio, consisting mostly of fiery independents -- and a few big guns like Time Warner's (NYSE: TWX  ) AOL Music and CBS' (NYSE: CBS  ) -- has also had its royalty run-ins.

Apple would never really leave. Then again, neither will MP3-swapping piracy.

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  • Report this Comment On October 03, 2008, at 4:29 PM, gslusher wrote:

    Would Apple have pulled the plug on the iTunes Store? You betcha. They would have done that to get their customers to pressure Congress into action. Apple can afford to take a short-term revenue hit. Apple's stock would have gone down, of course, but it would go down, anyway, perhaps because of manipulation. Apple management doesn't seem to be greatly concerned with the short-term performance of the company's stock, choosing to focus, instead, on the company's revenue, profit, and growth in the long term.

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