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Would Apple really shutter iTunes? Unlikely

A report in Fortune magazine says the company has threatened to shut down iTunes. Well, it sort of said that--over a year ago.

Apple did indeed say that if it couldn't make a profit, it "most likely" will not continue to operate iTunes. You can find a copy of the statement here on page 4 (PDF).

Fortune magazine published a bombshell of a story on Tuesday by reporting that Apple once threatened to close iTunes if forced to pay more for music royalties. A more careful reading of the statement from an Apple executive shows that it was more of a veiled threat. Regardless, it's possible Apple could shut down iTunes.

But is it likely? No. Here's why:

Screen grab of the document Apple filed with Copyright Royalty Board

First, the comment was made by Eddy Cue, vice president in charge of Apple's iTunes Store, in a written statement to the Copyright Royalty Board sometime before April 2007. The CRB is a three-judge panel that determines rates for statutory copyright licenses. On Thursday, the CRB is supposed to rule on a proposal by the National Music Publishers' Association to make download stores pay more for the songs they sell. The publishers want an increase from 9 cents a track to 15 cents, a 66-percent jump.

Representatives from the NMPA could not be reached.

In his letter to the CRB, Cue said he had no doubt that raising music prices at iTunes would reduce the number of purchases, stifle customer growth, and shrink payments to artists. If iTunes were to absorb the increase in royalty rates, then the store would likely lose money and the company wasn't interested in that.

Here's the meat of his statement: "Apple has repeatedly made clear that it is in this business to make money, and most likely would not continue to operate (iTunes) if it were no longer possible to do so profitably."

Cue's comment that the company has "repeatedly made clear" is something else to look at closely. I can't find another example where Apple has said it will shut down iTunes. Two music industry sources told me that at no time have iTunes' representatives made such a statement to the record labels--not in negotiations, not in passing, never.

Still, there's no denying that Cue told the CRB that the company might shut down iTunes if forced to pay higher royalties. I have to question why it has taken 18 months for Cue's comments to come to light, and why they're popping up just two days before the board is scheduled to rule on a possible rate hike?

Maybe it's coincidence. Or maybe Apple is firing a public-relations shot across the bow of the music industry and CRB. When it comes down to mass appeal, Apple holds all the cards. If word gets out that music publishers are trying to stick it to consumers, and Apple is fighting to keep prices down on their behalf, well, there's liable to be public backlash against the record industry. If this thing follows the normal course, there would be calls for boycotts, protests, and so on.

The other possibility is that Apple could pull the plug on iTunes. But how likely is that? Would Apple CEO Steve Jobs leave iPod owners without anything to watch or listen to? In such a scenario, consumers would be predictably angry and direct much of it at the music industry. Then, I suspect, they would go out and buy music from Amazon.com or someone else.

Apple has sold more than 160 million iPods, and iTunes has sold over 5 billion songs. The store is now the country's largest music retailer. Apple isn't going to throw that away, and the music industry isn't going to risk losing its largest distributor.

Look for a deal to get done soon.