More Extortion by the Record Distributors

The Register has some insights into the conflict between Universal's decision to go with an "At Will" arrangement with Apple's iTunes.

Basically, it comes down to the record distributors wanting to demand royalties on the music Players.

Microsoft already does so with it's abysmally received Zune player.

The article is right in some areas, and wrong in others though.

On why Apple is in the Driver's seat:

Another underlying tension is that Apple has made a huge amount of money from sales of iPods - far more than the labels have made from iTunes. As of April 2007, the iPod had sold over 100 million units worldwide. This makes iPod the best-selling digital audio player series in history.

Analyst estimates for iPhone sales in its first weekend ran as high as 700,000 units, beating many investors' expectations, and some expect the momentum to continue. The iTunes Store has sold over 2.5 billion songs since its inception four years ago, as well as 50 million TV shows and over 1.3 million movies, making it the world's most popular online music, TV, and movie store. But the labels only make 70c off each track. This revenue pales in comparison to the amount of money Apple generates from sales of such devices whose purpose, in full (the iPod) or in part (the iPhone) is to store and play these tracks. The money is in the hardware.

No. That $0.70 is pretty significant, particularly since Apple, and the end user are paying ALL costs of distribution. $1.75 billion is not chump change.

It is very possible that Universal intends to use the new "at will" deal to exert pressure on Apple to either replace the 99c fixed price with variable pricing or to agree to pay Universal a royalty on iPods, or both. Or as just discussed, Universal may wish to extend the royalty to any new products that play music, such as the iPhone.

True. They want to get all the golden eggs from the goose.

iPod's success does not depend on iTunes, but rather the elegance of iPod's design and ease of use. For these reasons, if Universal retreated from iTunes, no one can reasonably anticipate that it would seriously hurt sales of iPods or iPhones.

Generally agree, but I would also note that there is a chic factor driving iPod sales too.

The Audio Home Recording Act already imposes a royalty on digital tape recorders, but not MP3 Players or computers. But when the AHRA was passed in 1992, the personal computer was only just making its debut in the US, and the MP3 player had yet to be imagined. So while the Act compensates copyright owners and artists for lost sales because of copying, the income generated by the levy has been negligible because AHRA does not apply to the new generations of technology, including personal computers and MP3 players.

This is where the author jumps the shark. Digital tape is a failure because of the AHRA. Between the excessive fees on tapes, and the anti-copying technology that reduced playback quality on home units (notching), the AHRA destroyed the digital tape player.

So why hasn't the Act been extended to include this new generation of technology? The principal reason is that the major labels have not pushed for it. But wouldn't the record labels want to collect royalties from the manufacturers who are raking in money from sales of electronic equipment which is being used to acquire and listen to music without compensation to the labels?

Perhaps the main reason is the way royalties are distributed under the AHRA. The first third of royalties go to music publishers and writers. Then four per cent goes to side artists. The balance is paid 60 per cent to the labels and 40 per cent to the artists.

Maybe the record companies are afraid to push the extension of this Act to MP3 players and computers because they don't want to set another precedent of splitting proceeds on a 60:40 basis with the artists they represent. The standard artist royalty is only 10 to 15 per cent.

Moreover, under the AHRA the artists are paid directly. By targeting a successful individual manufacturer like Apple, Universal is aiming to recoup red balances (the amount it spends on production and marketing) on each artist's account. Most artists never recoup production and marketing costs so when the record labels collect money from their music, they "allocate" royalties to the artists' accounts but actually keep the money.

While cheating artists is a major profit stream for the studios, the blithe assertion that the act has not been extended to MP3 players and computers is, "major labels have not pushed for it" is again, wrong.

During the debate over the AHRA, it was clear, and it is more clear now, that Congress was unwilling to to apply it to computer makers, and the basis of the law in the first place, copying, does not apply to MP3 players, which play music, but do not copy music.

As much power as the labels have, the fact that they could not get computers covered in 1992 means that they cannot get this now.

The labels do not go for this because they know that they will lose.