iTunes increases wholesale payout for Independents

As I was researching iTunes’ margins for yesterday’s post, I stumbled across this interesting tidbit from Digital Music News. iTunes has increased its payout to independent labels from 65 cents to 70 cents on a 99-cent download. That doesn’t account for the fee collected by content aggregators, who are the primary channel through which most indies deal with iTunes.

Still, there’s a number of ways to read this development. iTunes is in an increasingly competitive situation and has the economic benefit of large and increasing volumes being spread across its fixed costs. That means an increase in its variable costs could be offset by gains in its operating margins. In other words, it’s the old “we’ll make it up on volume” strategy, minus the inventory baggage that dooms this strategy in the physical world.

The hard-core capitalists among us are bound to ask, “If sales are doing so well and you’re maintaining a dominant market share, why are you giving up margin instead of taking more of it?”

One answer: to starve existing competitors and to discourage new entrants. If iTunes pays out 70 cents, rightsholders will demand the same payout from iTunes competitors. Apple could be betting that such a payout will hurt its competitors more than it will hurt iTunes. And, given the arms race among major services to have the most comprehensive catalogs in digital music, it’s not as if a service can easily afford to pass on a deal.

Of course, the flipside is that iTunes may not have had a choice. With new services jumping into the market and Yahoo! signing partnerships with universities, wireless carriers and, most recently, satellite radio, perhaps this concession to labels indicates a realization by iTunes that it must take its competition much more seriously.