WHAT: In its second attempt at negotiating a music streaming operation, Apple has approached the three major labels asking for terms--$0.0006 cents per stream per listener--that are half of what Pandora pays ($0.0012 cents) through a pure-play license and nearly one-quarter of what simulcasters pay ($0.0021) through their webcasting license. Last fall, Apple first approached the majors, laying out the concept but forgoing specifics, implying it wanted a rate similar to that paid by Pandora without the either/or formula applied. Pandora uses a pure-play license to get a lower term than the webcasters, but it also comes with a "25% of total revenue" clause, requiring it to pay the higher amount, in its case the per-play rate.
WHY: ITunes can't apply for the pure-play license because it can't afford the "25% of total revenue" bucket that would come with it, considering the company had $156 billion in sales in its last fiscal year, meaning it would have to fork over $34 billion to the labels--five times more than the entire U.S. recording industry made in 2012. But it also figures that considering its consumer reach, the higher webcasting rate would also be costly to the profitability of its planned service, which would be dependent on advertising revenue. Initially, the major labels figured Apple wanted the same per-stream per-listener rate as Pandora, without the 25% bucket, and it seemed like Apple was confident its ad sales team could overcome Pandora's issue of too many listeners and not enough advertising sales growth. But maybe iTunes is worried it would attract even more listeners than Pandora, thus the request for the even lower rate.
WHO: The major labels would have to agree to these terms, and why would they? For one, iTunes could afford a big inducement in the form of a large advance, which would be too hard to turn down. But Apple has other pot sweeteners too, like embedding a "buy" button on the screen of whichever device is delivering the stream, which could potentially have a big impact on music sales. Also, unlike Pandora, Apple is talking to the labels about how they can influence what is streamed, which could help create hits and drive more sales.
IF: If the majors go along with this, they could jeopardize the digital rate structure for all digital radio except satellite broadcaster SiriusXM and the Music Choice cable channels. Since Apple is such a big player in the digital space, even the terms given to a nascent streaming service might be seen by the Copyright Royalty Board as a big enough deal to constitute a market-negotiated rate that it could embrace, by applying the terms to one of the existing classes of licenses. For instance, the pure-play license could be changed from its current either/or rate of 25% of total revenue or $0.0012 per song per listener (whichever is higher) to the $0.0006 rate when the CRB decides on new rates next year for 2015-19. If the pure-play license is set at that iTunes rate, it could affect the rates of all other digital licenses. -Ed Christman