Why The Online Music Industry Should Move To a Rev-Share Model

Memo to the Copyright Royalty Board: a bigger pie fills more bellies. Tomorrow, the three-judge panel that sets rates on music copyright fees is scheduled to announce new rates on digital music downloads for the next five years. The fees, which go to music publishers (the actual owners of the copyright to each song), are currently set at 9 cents per track. Music publishers want to raise that to 15 cents per track. Apple has vaguely threatened that it might have to shut down iTunes if the new rates go into effect (yeah, right).

Apple still controls about 85 percent of the digital download market, but these fees are also being paid by Amazon, Rhapsody, MySpace Music and others. The music publishers (who are often the artists themselves) want to future-proof their cut of the action and thus want to lock in as high a rate as possible. Apple and the record labels are arguing that the rates should be changed from a flat fee per song to a percentage of revenues. Apple wants to pay 6 percent of revenues, while the labels are suggesting 8 percent. Since, in the case of iTunes, this percentage would come out of the current 99 cents charged for each track, it actually amounts to a reduction in per track fees (6 cents and 8 cents respectively).

On its face, it looks like Apple and the record companies are once again trying to stick it to the little guy (artists, song writers, and other music publishers). But in this case, Apple and the recording industry are actually right. Music on the Web is currently crippled by the fees set by the Copyright Royalty Board (not just for downloads, but for streaming Internet radio as well). As it is, Apple pays 70 cents from each track sold to the record companies (which then pay the music publishers their cut). There is not much margin left out of which to take that extra 6 cents, and charging $1.05 per track will have an impact on sales.

Moving to a revenue-sharing model makes a lot more economic sense. That way digital music sales has more breathing room to establish itself, and the artists will be able to grow with the industry. Eight percent of a bigger pie is better than nine percent of a smaller one. Rather than focus on how much each publisher gets per track, the Copyright Royalty Board should try to maximize the total amount of fees that publishers will get. A rev-share model is the way to go.