Apple CEO Tim Cook speaks during the Apple World Wide Developers Conference in San Francisco on June 8, 2015.
Photograph by David Paul Morris — Bloomberg via Getty Images
By Jeff John Roberts
July 18, 2016

Don’t take the bait. Apple is floating what sounds like a clever plan to streamline royalty payments, but the scheme is a self-serving one that would hurt rivals and consumers and, in the long term, the music industry itself.

The plan surfaced on Friday when someone leaked a document to the New York Times and Billboard that described the company’s ideas for how the Copyright Royalty Board should set royalty rates. The Board, in case you’re unfamiliar, is responsible for determining how much companies like Spotify and YouTube should pay to the music industry to stream songs. The rates set by the board (which only cover some types of royalties) are in force for several years and, currently, Apple and other companies are weighing in on what those rates should be from 2018 to 2022.

So what’s Apple’s big idea? In short, it’s for the board to set streaming rates based on many times a company plays a song. That’s different from the current system in which Spotify and others pay royalties as a percentage of their revenue.

Billboard praises this as a victory for simplicity, in part, because it will create an alleged harmony across different rates: Under the Apple proposal, 100 streams will cost 9.1 cents, which will be the same as the rate for one download. Simple, huh?

Well, no, not really. Streams and downloads involve different rights, and the 100-to-1 ratio is entirely arbitrary. The board’s job is to define copyright rates, not invent the metric system. This didn’t stop the Times, though, from praising the harmony of Apple’s “innocuous” proposal and claiming it will clean up the “byzantine” rules that now govern payments.

This red herring of harmony, however, is hardly the worst part of Apple’s plan. Instead, the real problem is that switching from a percent-of-revenue model to a fixed rate model would likely wipe out Spotify and others that offer ad-based music services.

Even though these services, including YouTube, are the favorite whipping boys of the music industry, the reality is that they’re unprofitable since so much of their revenue is gobbled up by royalty payments — almost 85% in some cases. Spotify is already losing money, and so cranking up the royalty rates even further will likely drive it into bankruptcy, meaning it won’t be paying anyone.

Spotify, which did not immediately respond to a request for comment, currently pays 10.5% of its revenues for songwriter rights (in addition to a much larger chunk for the right to use recordings). Many believe that Apple’s proposed formula would force if to pay more.

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But what about Apple? Why is it asking for the change? A likely answer is the company doesn’t care if it loses money on royalty payments, since Apple’s primary business is about selling devices not music.

Indeed, as a federal judge pointed out in 2014, music helps “to promote sales of Apple products” — so the voluntary rates it pays to music companies shouldn’t be a guide to what’s appropriate for Pandora and Spotify to pay. Apple did not respond to a question about whether its Apple Music service makes a profit.

This doesn’t mean the current royalty system is fine. It is byzantine with a staggering set of different payment rates. But almost all of this complexity is rigged against digital companies, which have to make huge payments that legacy AM/FM stations do not.

If the industry wants to fix this mess, it will have to address larger problems, including how to make up for lost CD sales, rather than colluding with Apple to drive the likes of Spotify out of business.


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