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iRadio Is Coming, and Pandora Is Scared

By Rich Smith - Apr 1, 2013 at 1:54PM

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At least, Pandora shareholders are scared.

"iRadio is coming. There's no doubt about it anymore." That's the money quote from a weekend article published on The Verge -- and it's the reason shares of world's-biggest music-streamer Pandora (P) are down 4% shortly before 2 p.m. EDT today.

According to The Verge, Pandora's been pushing for lower royalty rates on the music it streams to its customers -- which currently cost the company $0.12 per 100 songs. The company is arguing that with the advent of Spotify and the imminent arrival of Apple (AAPL 1.89%) in the field, competition is heating up, the market is growing, and the music industry should be happy to make more money by charging less for a great many more songs being sent out through multiple pipes.

The problem, though, is that the music industry is pretty happy with the gig it has going now. According to the Recording Industry Association of America, music-streaming businesses such as Pandora and Spotify -- and Rdio, Vevo, and Google's YouTube to boot -- generated $1 billion for record labels last year, with Pandora contributing more than 25% of the take. So why would the industry want to accept any less than the $275 million to $325 million Pandora is estimated to be paying it?

Sure, Apple can enter the market with its long-rumored iRadio service, and if news reports are right, Apple might even be able to negotiate royalty rates as low as $0.06 per 100 songs on its own music streaming. Pandora can argue that this should entitle it to a lower royalty rate as well. (And Spotify certainly will -- it pays as much as $0.35!) But that doesn't mean that the music industry will agree.

Foolish takeaway
This, in a nutshell, is why Pandora shares are suffering today. Pandora says current royalty rates are too high for it to earn a profit from streaming music. Yet the company's ability to reduce the rates it pays remains in doubt.

The only thing there's no doubt about, according to The Verge, is that iRadio is coming, ready or not.

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