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Why Apple Should Launch a Pandora-Like Music Service

By Daniel Sparks - Apr 17, 2013 at 7:30PM

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Streaming music inspires digital downloads. Apple wants in on it.

Rumors that Apple (AAPL 0.17%) is working on a streaming music service, dubbed iRadio, continue to persist. But does the world really need another streaming music service? Isn't iTunes enough? A recent study by NPD provides convincing data that shows why a streaming music service might look compelling to Apple management.

What's so great about streaming music?
Apple's iTunes dominated the market of digital music downloads yet again in 2012, with fourth quarter market share coming in at 63%, according to NDP, down from 66% in 2010. Much of Apple's decline was at the expense of Amazon's gain from 13% to 22%.

Apple's decline, if anything, was less than expected. As NPD Senior Vice President of Industry Analysis Russ Crupnick explains, "There's a belief that consumers don't need to buy music because of streaming options, when in fact streamers are much more likely than the average consumer to buy music downloads." Put another way, as streaming music soars in popularity, it seems logical that digital downloads would decline. But the opposite is true: streaming listening inspires digital purchases.

Since people who listen to free streaming music are more likely to purchase music, Apple could be launching the service on the premise that if it gets more of its customers to listen to music, more of them will purchase music. Facts from NPD's study strongly support this idea. 38% U.S. consumers surveyed by NPD said that owning music is important to them, but among those that listen to Pandora (P) and other free music-streaming services, 41% said that owning music was important to them. "In fact, many free streamers attributed buying more downloads to their discovery on a radio or via an on-demand service," the study claimed.

iRadio could debut sooner than you think
Though Apple's known to be a tough negotiator when it comes to music royalties, the company does have a bit of bargaining power. "Since the launch of Apple's iTunes store, digital music downloads have become the dominant revenue source for the recorded music industry and iTunes continues to be the dominant retailer," Crupnick explains.

Recent rumors suggest that Apple is making progress on its iRadio service. The most recent rumor from The Verge takes on a very matter-of-fact tone:

Now multiple music industry insiders have told The Verge that significant progress has been made in the talks with two of the top labels: Universal and Warner. One of the sources said "iRadio is coming. There's no doubt about it anymore." Apple is pushing hard for a summertime launch.

Universal and Warner were two tough wins when it came to Apple's iCloud service. Universal was the last to sign and Warner apparently was leery of cloud-based services, according to MacRumors.

Pandora's demise?
If Apple does successfully launch a music streaming service, Pandora could be doomed. Any major competitor would be a serious threat to the company as it continues to post losses as it pays out more royalties than it's taking in on ad and subscription revenue.

Though Pandora's 200 million registered users are noteworthy, that number still pales compared to Apple's more than 500 million iTunes subscribers. Furthermore, as Pandora continues to spend more cash than it takes in, Apple has a $100 billion plus cash hoard and formidable cash-generating abilities, taking in $0.28 in free cash flow on every dollar of sales.

If Apple launches iRadio -- and it has plenty of reasons to do so -- it will likely be too small to meaningfully impact Apple's bottom line, but it will definitely threaten Pandora's business. Though it is possible Pandora could survive an iRadio, I'd rather not speculate. For now, investors should avoid Pandora shares, and wait to see how things play out.

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