Apple Dusts Off its Ebooks Playbook for Music

Library_of_Congress_(1)It’s hard to tell whether Apple is simply trolling Spotify with its pitch to the Copyright Royalty Board to adopt a fixed, per-use royalty rate for songwriting rights on streaming services in place or the current revenue-based formula, or whether it’s a serious proposal. But if it’s the latter, the CRB should at least consider the source before adopting it.

Whatever the proposal’s merits — simplified accounting, greater transparency, more money for songwriters — it has distinct echoes of Apple’s efforts to rewrite the rules for how ebooks are licensed that led to its being sued by the Justice Department for illegal price-fixing — a case Apple lost.

In that instance, Apple was looking to break into an ebook market thoroughly dominated by Amazon. At the time, Amazon purchased ebooks from publishers on traditional wholesale terms, just as it does printed books. Much to the chagrin of publishers, however, Amazon often sold ebooks at a deep discount, below its own cost, to help build the market for its Kindle ebook readers.

In the eyes of many publishers, that practice undermined the market for print copies, which were generally priced higher than the ebook version even without Amazon’s discounting. But there was little legally the publishers could do about it.

Enter Apple, with a plan to eliminate wholesale ebook sales altogether. Under a system it called agency pricing Apple offered to allow publishers to set the retail price of ebooks in the Apple Bookstore, while Apple would take a 30 percent commission on every sale.

While publishers sometimes received less gross revenue from Apple agency model than they would have under a traditional wholesale model, most eagerly embraced the idea because it allowed them to protect the market for higher-priced print books.

But there was a catch: Apple insisted on a “most-favored nation” (MFN) clause in its licensing deals with the publishers that would allow Apple to meet any retail price in the market lower than its own without sacrificing its own commission. In order to make good on that commitment without setting off a race to the bottom, the publishers had no choice but to force Amazon to accept agency pricing as well so they could control retail prices in the Kindle Store, which by and large they did after a series of bruising battles with the e-commerce giant.

The net effect of the arrangement was to shield Apple from having to compete on price in the ebook market, and to neuter the advantages of Amazon’s long head start and massive scale. The Justice Department called it a conspiracy to fix prices and sued Apple along with the five major publishing conglomerates.

The publishers all eventually settled and agreed to restore wholesale pricing and avoid MFN clauses in any future licensing agreements. Apple fought on but ultimately lost both the case and its appeal. Earlier this year, the Supreme Court declined to hear Apple’s final appeal, forcing it to accept the settlement terms laid out by the Justice Department.

While the details of Apple’s proposal to the CRB have not yet been released, based on what has been reported its ultimate effect would be similar to what the iPhone maker tried to engineer in the ebook market.

Apart from its appealing simplicity, imposing a fixed, per-stream royalty on streaming providers would likely impose higher costs on free, ad-supported services like YouTube and Spotify’s freemium tier. Those services generally don’t generate as much revenue as subscription services, but under the current system, in which songwriting royalties are calculated based on a percentage of revenue, they also enjoy lower relative royalty costs. Forcing free services to pay the same fixed minimum per-stream fee rather than a percentage of their revenue would eliminate that relative advantage, making free tiers much harder to sustain.

Much as with Apple’s scheme to break into the ebook market, the net effect of adopting a per-stream royalty would be to shield Apple, which does not have a free tier, from at least some of impact from free competition, make it easier for Apple to raise prices, and to neutralize some the benefits of Spotify’s scale and early-mover advantage.

The difference in this case is that the CRB, whose Congress-sanctioned job is in fact to fix prices, would be doing Apple’s dirty work, rather than Apple itself, which would likely also shield the company from any pesky lawsuits from the Justice Department.

All of which is not to say that adopting a fixed, per-stream royalty may not be a good idea. Regardless of where anyone comes down on the merits of free streaming, anything that increases transparency into the collection and accounting of music royalties, or improves the lot of songwriters and musicians, would be an improvement over the current system.

But such a radical change could also have a significant impact on the competitive landscape for streaming services, which is not really part of the CRB’s brief. Fortunately, the CRB judges have plenty of time to think about it. Any change to the current rate would not take effect until 2018.

— Sweeting

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