Apple's long-awaited iTunes Radio, unveiled yesterday at the computer giant's annual Worldwide Developer's Conference in San Francisco, is part of what senior vice president Eddy Cue calls "the best music player we have ever done." But it's surprisingly similar to Pandora – streaming stations organized by category, playlists customized by users' tastes, free with ads.
"It's not a question of market need – not only do we have Pandora and Spotify, but Clear Channel's been doing a good job getting iheartradio into people's mobile devices," says Aram Sinnreich, a digital-music analyst and Rutgers University media professor. "This is Apple's bid to bring some of that advertising money onto digital platforms, which is potentially billions of dollars in revenues."
In part because Apple's late founder Steve Jobs refused to jump into the streaming-music or subscription businesses, the company has allowed other services to dominate the market, from startups such as Spotify, Rdio and Slacker to big players Google and Beats by Dre. Apple, however, has a built-in competitive edge – the ability to sell online music to radio listeners in the same place. "They've built out iTunes in an interesting way that takes that model of Top 40 radio and record stores and replicates it in a frictionless way on the Internet," says a source close to the nine months of online-radio negotiations between Apple and the major labels, which control most of the world's recorded music.
The source wouldn't specify what royalty rate Apple negotiated with the record labels for content, but said, "We've made sure we've got the right economics in place." The source added, though, that music publishers, who receive roughly four percent of Pandora revenue, will get "over double" that amount. A second source in the music business said one top publisher will receive 10 percent of overall iTunes Radio ad revenue. "We consider this an introductory deal," says the source, who expects renegotiations after two years.
Thirteen-year-old Pandora, which has 200 million registered users, released a statement calling iTunes Radio "an evolution of their iTunes offering to bring it on par with other streaming music services."
For all of Pandora's user growth and loyalty, some in the record business have been frustrated that the longstanding online-radio company hasn't spent more time on how to generate more revenue. "The labels have said to Pandora for years, ‘Let's negotiate and figure this shit out. Why aren't you selling more downloads? Why aren't you driving more subscriptions? Why aren't you figure out ways to sell more advertising?'" says the source close to the iTunes Radio negotiations. "They're not doing that."
Apple's iTunes Radio, which will make its debut along with the company's iOS 7 mobile platform in the fall, will be free for subscribers to Apple's existing iMatch service. The new radio capabilities are likely to push Pandora to more innovation, Sinnreich says: "I love Pandora. It's a pioneering service. Their software works well. But they've been dominant so long that they haven't really progressed, in terms of making their service more sophisticated. Having Apple is going to kick Pandora to greater good."