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Behind the Apple vs Universal breakup

Taxing the hardware?

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Good idea - bad execution

I believe Universal is right in seeking a royalty on electronics sales. "Free music" is really not free at all. The electronics business, including Apple, is making a fortune from so called "free music" - because you need to buy a computer, blank CDs, and an MP3 player to enjoy the "free" music.

The Audio Home Recording Act already imposes a royalty on digital tape recorders, but not MP3 Players or computers. But when the AHRA was passed in 1992, the personal computer was only just making its debut in the US, and the MP3 player had yet to be imagined. So while the Act compensates copyright owners and artists for lost sales because of copying, the income generated by the levy has been negligible because AHRA does not apply to the new generations of technology, including personal computers and MP3 players.

So why hasn't the Act been extended to include this new generation of technology? The principal reason is that the major labels have not pushed for it. But wouldn't the record labels want to collect royalties from the manufacturers who are raking in money from sales of electronic equipment which is being used to acquire and listen to music without compensation to the labels?

Perhaps the main reason is the way royalties are distributed under the AHRA. The first third of royalties go to music publishers and writers. Then four per cent goes to side artists. The balance is paid 60 per cent to the labels and 40 per cent to the artists.

Maybe the record companies are afraid to push the extension of this Act to MP3 players and computers because they don't want to set another precedent of splitting proceeds on a 60:40 basis with the artists they represent. The standard artist royalty is only 10 to 15 per cent.

Moreover, under the AHRA the artists are paid directly. By targeting a successful individual manufacturer like Apple, Universal is aiming to recoup red balances (the amount it spends on production and marketing) on each artist's account. Most artists never recoup production and marketing costs so when the record labels collect money from their music, they "allocate" royalties to the artists' accounts but actually keep the money.

It is estimated that 235 million computers were sold throughout the world in 2006. If the labels collectively went after the electronics industry, consider the income it could generate from a significant royalty on the combined millions of computers, MP3 players, and MP3 capable cell phones sold each year.

If Universal, just one of four majors who collectively produce and distribute approximately 80 per cent of recorded music, could get $1 per Zune, the labels together may be able to get $4 to $5 or more for each computer and MP3 player, that could add up to an extraordinary amount of money that could compensate for lost sales due to "free music".

Since we have seen Universal's leverage against Apple is weak, it will probably never get any money from the iPod or iPhone. But if it sat down with the other major labels, the electronics business, and members of congress, it could work out a deal to extend the AHRA. And wouldn't getting 60 per cent of something be better than zero per cent of nothing?

Even if they actually had to pay the artists? ®

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