Apple threatens iTunes closure if costs rise

 

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By Simon Aughton

Posted on 1 Oct 2008 at 10:17

Apple would rather close the iTunes music store than increase prices to meet higher royalty costs, according to the head of its Internet Services division.

The US Copyright Board is expected to rule later this week on a claim by the Music Publishers' Association (MPA) for an increase in the royalty on digital sales from 9 to 15 cents per track.

But the head of Apple's Internet Services division, Eddy Cue, told Fortune that the company is not prepared to bear the burden of any increase.

"The result would be to significantly increase the likelihood of the store operating at a financial loss - which is no alternative at all," he wrote in a submission to the Royalty board.

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

Apple charges 99 cents per track, of which 70 cents go to the record company which then passes on the royalties. But with record company revenues falling by the year, they are unlikely to absorb the extra cost themselves.

Instead the burden will fall on Apple either to cover the increased royalties out of its own margin or to increase prices, something it has steadfastly refused to do.

In fact Apple, as a member of the Digital Music Association has called for a reduction in the royalty rate, arguing that it has risen - and looks likely to rise further - while the average price per track has fallen.

MPA president David Israelite remains unmoved, however: "Apple may want to sell songs cheaply to sell iPods," he says. "We don't make a penny on the sale of an iPod."