Apple’s clout showing itself in royalty rate negotiations with major music labels

CNET reports Apple is close to an internet music streaming deal. As this blog has suggested, Apple’s desire to get into the business has been slowed by the same royalty rate issues that plague Pandora and others in that space … the streaming margins are too small and the royalty rates are too high for volume to make up for losses.  There is no break-even point in sight for Pandora at current rates…a fact that propelled the CEO to announce his resignation.

Apple is not Pandora. They have leverage few companies have, and though there is no agreement yet, unnamed sources say they are close with Warner and Universal, and can SONY be far behind? As IP Value Wire has reported, the current royalty rate for internet radio is a non-starter, so Apple needs to negotiate a lower rate, but bring other sweeteners to the table. Here’s what is being suggested.

“Apple’s planned music service would offer new revenue streams” to augment the lower royalty rates.  Music labels will get paid much more from Apple than from Pandora/Spotify/RDIO, because they will also share in the proceeds for downloads from iTunes, facilitated through Apple streaming, and from “new audio ads Apple is planning on adding to the free service.”

This summer is an important target for Apple’s service, as still more competition reportedly is coming from Google’s YouTube.  Key point:  Pandora and others are lobbying Congress to make the royalty rate they pay more in line with that paid by satellite radio.  So far, artists and the major labels have fought that successfully.  If the royalty rate part of the Apple arrangement is, indeed, ½ that currently paid by Pandora, which is being suggested, would that not give Pandora (and Spotify, RDIO, etc.) more fuel for a fairness claim (see “What is the Internet Radio Fairness Act?”)?