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Apple Gets a Headache from Music Rights

Apple (AAPL) has had some bad news on the music front. First, at least for now, samples will remain at 30 second lengths and not the minute it -- and, presumably, consumers -- would like. But that's minor compared to a federal court ruling that Apple customers don't actually buy music tracks they download, but license them. That could mean a big financial upset in the relationships between labels and performers -- and, as a result, all arrangements between the labels and retailers like Apple. Guess what happens when labels don't make as much money as they thought? They go back to the retailer and raise prices.

The issue that keeps coming up, and that so few companies in high tech really get, is rights. When you're dealing with engineering and designs and patents, things can be relatively clear. You acquire the rights you need directly from the individuals or companies that produce what you want. Although you see disputes over whether the products or services of one business infringe on the patents of another, that is clean-cut compared to the intricacies of music, writing, and video.

What often trips up technology businesses is that they don't have the experience of the chain of interactions that accompany content. The more they want to use content as a way to distinguish and sell hardware and software, the more they come up against these issues. Even companies in the publishing, music, and video businesses often lose track, either because executives came from other industries and brushed over rights issues as something for lawyers, or because they've deliberately pushed boundaries, hoping that no one would notice.

Look at the court case. As the Wall Street Journal explains, musicians can see two different levels of royalty, depending on what a studio has done with their music. For licensed uses -- think of a song appearing in a movie, on a television show, or as part of a commercial -- the studio owes 50 percent of the proceeds. If, however, music is sold through CDs, say, musicians get between 10 percent and 20 percent of the money.

Rapper Eminem had sued Universal Music Group for royalties he claimed were owed under digital sales. Initially a court sided with Universal, but the U.S. Court of Appeals for the Ninth Circuit disagreed and reversed the decision in favor of Eminem. And if the labels have to pay musicians more money, guess who gets a smaller discount?

The reason is titanic in its irony. Because the studios have required retailers like Apple to place so many encumbrances on the music -- digital rights management, anyone? -- the court held that they weren't actually selling the music. If the downloads were like CD sales, there are many things a consumer could do out of the control of the retailer or label. Even when DRM isn't in play, legal restrictions on what consumers can and cannot do are still common.

Complexities also tripped Apple in trying to provide longer samples of music. The company negotiated with the labels, but not the owners of the music itself, who have a say in performance rights.

If tech companies insist on moving further into the content business, and I don't think they have any other choice, then they need to get a crash course in the real issues that come up when with intangible property issues, rather than crossing their fingers and hoping things work out in their favor.


Image: courtesy Universal Music Group