Record labels still on top despite online revolution

Record companies are taking such a large cut from tracks sold online that many of the burgeoning online music stores will go out of business, experts warned yesterday.

Record companies are taking such a large cut from tracks sold online that many of the burgeoning online music stores will go out of business, experts warned yesterday.

Figures obtained by The Independent show that the labels take home the lion's share of the cost of a digital download - making more money per track than they do with CDs in shops.

Online stores such as Apple's iTunes were seen as a revolution in music sales, with customers turning their backs on CDs to shop online. Many also believed that the stores would drive down the cost of online tracks.

But figures from the US show that Apple Computer, the dominant legal download business in Europe and the US, retains just 4 cents from each 99-cent (55p) track sale while "mechanical copyright" holders - generally the record labels, who own copyright in the song's recording - take 62 cents or more. Music publishers take the rest - about 8 cents.

With the sites, the copyright owners have doubled their share of royalties, even though the marginal cost of manufacturing has fallen to almost zero.

The revelation will embarrass industry executives, who meet this week in Manchester for their annual In The City music conference.

The figures also cast doubt on the viability of the dozens of companies storming into the market - recent arrivals include the high street store Woolworths, and Stelios Haji-Ioannou, founder of easyJet.

Apple has the advantage that only tracks sold from its iTunes Music Store play on its profitable iPod digital music player, of which the company has sold 1.6 million this year. Songs from other commercial download sites cannot be played on the iPod. Apple declined to comment on the figures. It has said its prices depend on each country.

Legal download sites thus herald a quiet coup for the record companies, which had seemed threatened by the explosion in illicit file-sharing and falling CD sales. Online stores have also been criticised for offering less than physical CDs: the sound is lower quality, and the digital tracks contain encoded restrictions on copying to other PCs or handheld music players, and on "burning" the music to CDs for personal use.

But despite the lack of profits, more and more companies are joining the UK online music business, which has leapt from about 100,000 downloads per month at the start of the year to 500,000 in August. About half are from Apple.

Tom Dunmore, editor of the new online music magazine Rip & Burn, forecast that at current licensing prices, many more legal download sites will launch in the next 12 months - and then quietly disappear within five years.

Phil Evans, a spokesman for the Consumers Association, said the data suggested record labels would have to change - or strangle the nascent market. He said: "Unless the record labels look at new [distribution] models, they're bringing about their own demise."Michael Robertson, the founder of MP3.com, is blunter. He says commercial downloading is so unprofitable it is "a race where the winner gets shot in the head".