Apple threatens closure of the iTunes music store if price hike approved

An impending decision by the US Copyright Royalty Board to raise royalties on digital music downloads has led Apple to declare that it would shut down the iTunes music store if the 66 percent rise went ahead.

Eddy Cue in charge of the iTunes business said “if iTunes was forced to absorb any increase in the royalty rate the result would be to significantly increase the likelihood of the store operating at a financial loss – which is no alternative at all. Apple has repeatedly made it clear that it is in this business to make money and most likely would not continue to operate iTunes if it were no longer possible to do so profitably.”

A decision from the board is due Thursday (Friday AUS time).

Apple’s reaction seems like a bit of sabre rattling. While Apple certainly has the right to shut down the iTunes store if it becomes unprofitable the ramifications of doing so surely outweigh the negatives associated with keeping it running and imposing a price hike for consumers. Think consumer backlash class actions and a severely impeded consumer proposition for buying iPods and iPhones.

If you think the the situation looks bleak for Apple think about the poor Recording Industry Association of America (RIAA). If Apple was to shut down the iTunes music store the RIAA (and all of its members) would lose the largest retailer of music (digital or otherwise) in the world. This is something you’d assume would severely impact their profitability. Repercussions for the music industry would be far reaching and would also likely spark a steep rise in music piracy – already the single largest problem facing the industry.

But what are Apple’s other options if the rate rise is approved? Apple could raise the price of music to cover the hike but this would surely decrease demand for downloads. They could also increase the price of iPods (and by doing so apply a “royalty” tax on iPods) but this again would lead to consumer frustration.

On another front Apple is also being sued by a Norwegian consumer group because DRM wrapped music from iTunes can’t be played on other MP3 players.

Mr Thon consumer ombudsman in Norway said “I want them to make their services interoperable so that you can play music bought on iTunes on other devices including mobile phones. The consumer’s freedom of choice in the online music market is an important right.”

There are so many ways to respond to this comment and this article provides a nice summary. The points I particularly like are “Why is Norway so interested in making DRM cross-platform instead of illegal?” and “Has Norway asked gamebox manufacturers to implement mandatory cross-platform licensing among consoles like XBox 360 and PS3″

Unfortunately until the stubborn record labels let Apple sell all its music as unprotected AAC files there’s not much Apple can do about it. While shutting down the store is a remote outcome of the royalty price hike you can bet Apple would rather pull out of Norway then open up DRM to other music players.

We’ll keep you posted on the board’s decision due Friday.