Apple's Streaming Music Deal Broke Down Over These Few Cents

The relationship between record labels and Apple has always had an "offer you can't refuse" tension. So as Apple looks expand more robustly into streaming music, it's not surprising that labels are bristling — even if the "too low" per-song economics might actually be an increase.

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For months, rumors have circulated that Apple wanted to start competing with online streaming services like Pandora and Spotify, which are increasingly changing the way the music industry runs and measures itself. Each of those services has a separate deal with record labels, offering a per-song fee every time a user plays a track. For Apple to offer an equivalent streaming service, it needs a similar deal, but so far the labels don't like the offer.

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For Apple, it's a much different economic calculus than its first deal with labels, the 2002 agreement that cracked open online music purchases. Labels almost immediately bristled at the deal, eventually demanding (and getting) differentiated song prices by type — though 2012 marked the first time since 1999 that label revenue rose thanks to the transition to digital.

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A lawsuit between Eminem and Apple over the unauthorized use of one of his songs in an ad provided one of the first glimpses into the Apple/labels deal. These figures may have changed, but there's reason to believe that they haven't much. As of 2010, the breakdown for each sale of a song went like this.

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Thirty percent to Apple; 70 percent to the label, which paid out 12 percent of what it got to songwriters.

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In 2011, Apple announced iTunes Match, a $25-a-year service that stored copies of a user's music — purchased from Apple or not — online, allowing playback from anywhere, including mobile devices. Last February, the economics of that deal came to light through a blog post from Tunecore's Jeff Price. MacRumors broke it down:

Price tells MacRumors that Apple keeps 30% of iTunes Match revenues for itself -- the same percentage the company keeps from the iTunes and App Stores. The remaining 70% is divided, with 88% going to record labels and 12% going to songwriters. The royalties are split amongst artists based on "how many times someone accesses your song" via iTunes Match and it doesn't matter if a song is matched or uploaded -- the royalty is paid either way.

Notice that last part: Each time someone plays a song, even a song the user bought and "owns," the record label gets paid.

This morning, the first reports of Apple's proposal to labels for a streaming service hit the newspapers. The New York Post outlines Apple's offer:

The tech titan, the most valuable company in the world, made an initial offer to the label of about 6 cents per 100 songs streamed, sources said.

That’s about half of the 12 cents per 100 songs paid by Pandora, the leading online radio service that Apple is taking aim at, sources said.

In fact, the Post notes that six cents per song is the lowest of any streaming service, including radio.

But here's what's interesting. Remember: Apple already has a streaming service: iTunes Match. Last September, Josh Davison of the band Parks and Garden posted on Twitter the amount iTunes Match netted him per song — in short, about a third of a cent. If Davison, a songwriter, makes that much, it's safe to assume that the label is getting about two-and-a-half cents, using the figures in that pie chart up above (labels get just over seven times what songwriters do).

Meaning that Apple's offer may actually be twice what it's already paying.

It's not an Apples-to-Apples comparison. Many iTunes Match songs have already generated revenue for the labels after being sold to Apple customers. But Apple offers a lot of concomitant benefit with that six cents: a pre-installed user base, existing software tools, and — most important — one-click purchases from millions of users who already have credit cards on file.

Reports out this afternoon suggest that Apple's sale pitch to the labels, whatever it was, didn't work. The Verge says talks have broken down. When they resume (which they will) Apple will face one of the worst negotiating positions its seen in its long battle with record labels — and perhaps a threat to its nearly unbroken string of victories.