The price of success for Apple

Interesting juxtaposition right now between Apple’s ebook price-fixing trial underway in New York and its negotiations with the record companies and music publishers as it seeks to launch its web-radio/music-streaming service.

In the ebook case, Apple is arguing — in effect if not as a matter of law — that it had to help the publishers raise ebook prices for the good of the business. “Apple should be applauded and not condemned for its beneficial impact on the ebook market,” its attorney Orin Snyder insisted in his opening statement.  Before Apple entered the business, he claimed, the market was “headed nowhere good,” under the near-monopoly control of Amazon. Since Apple helped break Amazon’s grip, many more competitors have started selling ebooks, from “little brownstones in Vermont” to “solo authors acting without a publisher.”

If the reports on its negotiations with the record labels and publishers are true, meanwhile, Apple may — in effect — be about to help the music companies raise prices in the music streaming business as well, at least at the wholesale level. And someone might well claim that it, too, would be for the good of the business.

The music trade Billboard reported over the weekend that Apple has reached a deal with Warner Music Group and its publishing arm Warner/Chappell Music late last week covering the Warner catalog. According to the report, the terms call for Apple to pay the record company a per-stream rate of 0.16 cents. That’s in line with the deal it reportedly struck with Universal Music in April. But it’s higher than the 0.12 cents per stream that the leading web-radio service Pandora pays the labels.

On the publishing side, Apple agreed to pay Warner/Chappell a percentage of its ad revenue that is more than twice the 4 percent Pandora pays, according to the Billboard report (Apple is yet to reach a publishing deal for the Universal catalog).

Pandora, of course, never negotiated with the labels. Instead, it operates under the compulsory license for web radio and pays the royalty rate set out by statute. That arrangement has made almost no one happy, however. The labels and artists claim the statutory per-stream royalty rate is far too low while Pandora claims the current arrangement makes it impossible for it to make a profit.

Pandora, in fact, is pushing a bill in Congress, the Internet Radio Fairness Act, that would do away with the per-stream royalty altogether and set the radio or internet radio as a percentage of gross revenue earned by a service, similar to what satellite radio pays. It has also sued ASCAP seeking to roll back the performance royalties it pays to songwriters and performers. The record companies and the publishers claim those changes would result in even less revenue going to rights owners and creators and want Pandora to pay more than it does now, not less.

Apple originally sought an even lower per-stream royalty from the labels than Pandora pays (Apple’s service is expected to include functionality that is not covered by the compulsory license for internet radio so it had no choice but to negotiate directly with the labels). But the labels complained that would put them in an awkward position in their battle with Pandora: if a lower rate were good enough for Apple, why not everyone else? While anxious to have Apple in the market to help grow the business, the labels don’t want it growing on the current terms.

So the two sides came up with a new formula, in which Apple is paying more than the law requires for its ad-supported streaming service, presumably in exchange for keeping a bigger cut of whatever other revenues its iTunes streaming service generates.

If it works, the labels and the publishers would have a pretty good counter-argument to Pandora’s claim that it is unable to make money at the current statutory royalty rate: If Apple can pay more and still make a profit, why should the law continue to allow other web-radio services to pay less?