Here Comes Apple's iRadio

Talk of an Apple (NASDAQ: AAPL  ) online music streaming service has persisted for the past year or so, in what most are now casually referring to as "iRadio." That's despite the fact that iRadio is already a registered trademark, which is the same challenge Apple faces with the "iTV" everyone's been talking about. Regardless of what Apple ends up calling its new streaming service, it's about to be unveiled to the world, according to a pair of recent reports.

CNET says that the Mac maker is about to ink a licensing deal with two out of four of the major record labels. Warner Music and Universal Music Group may be preparing to sign on the dotted line within the next week. CNET's tipsters say the service resembles Pandora (NYSE: P  ) , and doesn't offer on-demand listening like Spotify. Apple could appeal to labels by offering audio ad revenue sharing agreements, and the labels would also benefit if Apple can cross-sell songs in iTunes.

As one of the predominant music streamers with a first-mover advantage, Pandora has the most to lose from an Apple entry. This comes just as the company just reported total listener hours soaring to 14 billion last fiscal year, nearly four times the 3.8 billion listener hours served up two years ago. Active users more than doubled to 65.6 million over the same time.

The Verge believes Apple will launch during the summer, quoting one of its own music industry sources as saying, "iRadio is coming. There's no doubt about it anymore." The industry is recognizing that access models are the future, with Pandora contributing roughly 25% of all access model revenue.

That may be a tough pill for Apple to swallow, as Steve Jobs famously bashed subscription access models as bad for the user. Jobs insisted that consumers like to own their music, since inevitable price hikes in subscription services force consumers to pay increasing fees or face losing all the content they've grown accustomed to.

While some don't believe Apple should jump into music streaming because it's generally not a profitable business, black ink has never been the motive for iTunes. Apple has historically operated iTunes slightly above break-even. The real goal for iTunes has always been to offer complementary content to boost device sales.

Breaking break-even
Asymco's Horace Dediu estimates that Apple has recently departed from the break-even model and that iTunes and software (which were recently bundled together in Apple's segment reporting restructuring) now generate $2 billion in operating income annually. Most of that positive operating income is generated from Apple's first-party software offerings and not from music and apps (which are the bulk of iTunes sales).

The point of an iRadio service would not be to pad the bottom line; it would be an additional complementary service offering that could be integrated into devices to boost sales. Investors may only be a few months away from finding out for sure.

There's a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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  • Report this Comment On April 06, 2013, at 10:24 AM, DigitalMediaView wrote:

    Good article. A few comments. There are now three major label groups after EMI was acquired by Universal, with a chunk of those assets subsequently going to Warner (regulatory approval move). So if the rumors are true, AAPL is getting to critical mass on label deals, with parties that represent ~2/3rds of the market.

    The threat to P is big, as you note, in two primary ways. First, AAPL is P's most important distribution partner, providing half of P's mobile distribution in the US. With iRadio fully integrated into iTunes, Pandora will become a second class citizen on the iPlatform, competing with a service that has feature enhancements and one-click song purchase. The second big threat is content costs. Everyone speculated that AAPL was trying to force a discounted rate from music companies, but the CNET article outlines how with a combination of a flat streaming rate, ad rev share and download sales, AAPL is actually committing to paying the labels more for the service. They can afford to do this because, as you note, AAPL is able to operate content services at break-even. They use content for customer acquisition and capture revenue through their ecosystem in other ways, primarily hardware. So, rather than serving as a precedent to help P get lower rates from regulators or legislators, this AAPL deal will accomplish the opposite, setting the bar higher. P is not profitable because of its existing content costs. Increased content costs would be devastating.

    Finally, iRadio is not a jukebox in the sky model like Spotify, where all music is rented for a monthly fee. It is a free ad-supported music discovery experience that will be highly complementary to iTunes and will drive a lot of purchases. Jobs was involved in early planning of this type of service. I don't think iRadio deviates from Steve's vision, but rather is an extension of it.

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