Apple Said to Seek Lower Rate in New Deals With Record Labels

(Bloomberg) -- Apple Inc. is seeking to reduce record labels’ share of revenue from streaming, part of negotiations to revise the iPhone maker’s overall relationship with the music industry, according to people familiar with the matter.

The talks cover Apple’s agreements for Apple Music, the two-year-old streaming service offering millions of songs on demand, and iTunes, the store where people can buy individual songs or albums. The record labels’ deals with Apple expire at the end of June, though they are likely to be extended if the parties can’t agree on new terms by then, said the people, who asked not to be identified discussing private information.

The negotiations would bring Apple closer to the rate Spotify Ltd. pays labels, and allow both sides to adjust to the new realities of the music industry. Streaming services have been a source of renewed hope following a decade of decline in the digital age.

Record labels are now more optimistic about the future health of their industry, which grew 5.9 percent last year worldwide thanks to paid streaming services Spotify and Apple Music. They recently negotiated a new deal with Spotify further lowering their take from the service, provided Spotify’s growth continues.

Under Apple’s current deal, record labels at first received about 58 percent of revenue from Apple Music subscribers, a higher cut than from other major streaming services including Spotify, the largest paid music-streaming service in the world. Spotify reduced its rate to 52 percent from 55 percent in recent negotiations with labels, tied to certain guarantees on subscriber growth. The labels are open to a reduction in Apple’s rate -- provided it’s also able to expand subscriber rolls and meet other requirements, the people said.

Apple initially overpaid to placate the labels, who were concerned Apple Music would cripple or cannibalize iTunes, a major source of revenue. Though online sales of music have plummeted over the past few years, they still account for 24 percent of sales in the U.S., according to the Recording Industry Association of America.

The growth of Apple Music hasn’t been as detrimental to iTunes as labels had feared. But record labels are still asking for precautions.

Labels have asked Apple to commit to promoting iTunes, and music in general, in countries where streaming isn’t as prevalent. Residents of Japan and Germany, two of the largest music markets in the world, still primarily buy individual records and songs rather than stream. Consumers in territories with poor mobile broadband are more likely to download music on iTunes than stream via Apple Music or Spotify.

To contact the reporters on this story: Lucas Shaw in Los Angeles at lshaw31@bloomberg.net, Alex Webb in San Francisco at awebb25@bloomberg.net.

To contact the editor responsible for this story: Crayton Harrison at tharrison5@bloomberg.net.