Apple Takes on Radio

When Apple held its annual Worldwide Developer’s Conference in San Francisco on June 10, it launched a new operating system and a new Mac Pro. However, it was the promise of iTunes Radio that caused the real stir. The company had been negotiating streaming licenses with the major labels since the fall, and an agreement was finally on the table.¹

The value of streaming music is apparent to Apple. iPhone and iPad users already access apps like Pandora and Spotify in great numbers from its App store. Both companies opened a new market for recorded music and Apple can now move in, extoll its own power of being one of the most valuable companies in the world, and use its extraordinary large cash holdings as leverage with the record labels.

iTunes Radio is to feature 200 genre-based stations and allow users to make their own custom station based on a song or artist, similar to the Genius feature in iTunes.  Siri would also be a part of the iTunes Radio experience. For example, users could ask Siri, “who plays that song?” and start a station based on the song by further telling Siri to play “more like it.” ²

iTunes Radio is to come in two forms: a free, ad-supported version and,  if the user pays  $24.99 a year,  an ad-free version including the Apple’s iTunes Match cloud storage service. Additionally, iTunes would allow the recording of songs that have recently been streamed on iTunes radio. This would enable users to see their recently played tunes and easily purchase them from the iTunes store.

Dealing and Weaving

For the service to see the light of day, Apple had to acquire the music rights from the three  majors, Warner, Sony, and Universal, as well as their associated publishing companies.  A recent trend has been for the larger labels and publishing companies to pull their music from performance rights organizations and look for a direct licensing agreement with the streaming services. As this results in long negotiations, for, among other things, companies try to second-guess the deals that their competitors are getting, negotiations for Apple iRadio had been in development for a while.

Apple initially offered the majors $0.0006 per stream, which was approximately half of what Pandora paid. In addition, it promised them an undisclosed percentage of advertising revenue and a guaranteed minimum sum if the service did not produce revenue as expected (in fact, Sony had an issue with Apple’s request to eliminate payment for songs that users skipped or did not listen to in their entirety). ³

It appears that when a settlement was reached, the majors felt it was not the best deal they could get. It also came with a special caveat: the majors would likely have to explain in Congress why the agreed to such special rates from Apple but not from the other Internet radio services. Still, Apple won the day: Universal Music Group’s recording arm was the first to sign a contract and was followed quickly by Warner Music Group and Warner/Chappell publishing; ⁴ the final holdouts, Sony Music and Sony/ATV, signed with Apple shortly before the Developer’s Conference.⁵

The details of the deal are still confusing though, and information here and there is contradictory. For instance, Billboard reported that Apple agreed to pay Warner Music Group and Universal Music Group a rate of $0.0016 per stream, as well as a percentage of ad-revenue.⁶ The figure would make Pandora’s own payments, at around $0.00012 per stream, look cheap.  Moreover, it was also reported in Billboard that Sony/ATV’s CEO, Marty Bandier, signed a two-year introductory deal that gives his company as much as 10% of the ad-revenue Apple generates from the company’s catalog.  If all the majors were receiving similar deals, perhaps they did not come out as badly as they imply. ⁷

Regarding the independent labels and publishers,  Hypebot and Digital Music News report that Apple sent a non-negotiable  “take it or leave it” contract . It offered indies $0.0013 per “royalty bearing performance” plus 15% of net advertising revenue, a figure that would increase above $0.0013 and 19% of net ad-revenue in the second year.⁸

On the face of it, the terms were not bad. But Apple would not pay royalties under the following circumstances:   (i) during the 120-day beta period; (ii) on “Heat Seeker” promotions that are approved at iTunes discretion; (iii) on “Complete My Album” plays, which are defined as “a performance of a sound recording identified for a given listener or a remaining track” and “rendered for such listener in order to promote the relevant CMA offer”; (iv) on listener matched content, or music that is already in the user’s collection; and (v) if two songs are played in an hour and the songs are already in the user’s cloud collection.⁹

The heaviest iTunes Radio users would likely chose stations that match their tastes and would probably have some songs already in their collections. Therefore, its is likely that the “no royalties on two songs per hour” rule could, in particular, work heavily to Apple’s advantage. Hypebot estimates that it could cut royalty payments by 10-14%.

In the meantime,  is still possible that Apple will try an “all or nothing” move that will punish iTunes Radio holdouts by removing their music from the iTunes store.⁹ But this could have mixed results.  The Merlin Network, a global rights agency for independent record labels that had no part in negotiations with iTunes Radio, believes that iTunes cannot be a dominant force in the streaming market without the support of most indie labels and their publishers.  Charles Caldas, Merlin’s CEO, has argued that indie products perform 12 to 20 percent better on streaming services than in download markets, a fact that may not be lost on Apple.¹⁰

The competition

Other streaming companies have already made a name for themselves, and Apple will be faced with the task of pulling customers away from established competitors.  The task may not be easy.

For instance, Pandora, iRadio’s direct competitor, maps a song’s “genome” and its non-interactive radio on it; it has over one million songs in its catalogue and the service features two different user models: the free, ad-supported model, and the  $3.99/month or $36/year ad-free model.  Spotify, on the other hand, has over 20 million songs in its catalogue, supporting two different user models: a limited use, ad-supported model and a $9.99 per month, unlimited music subscription, free of advertisements; it offers both interactive streaming and a custom radio feature.¹⁰ Newcomer Google All Access has 18 millions songs, and is a subscription-based service charging $9.99 per month: subscribers get unlimited access to Google’s catalogue and may also create custom radio stations. ¹¹ Other threats to iRadio would be Deezer, Rdio, Xbox Music, Daisy, and Grooveshark.

But Pandora is Apple’s most immediate concern. Apple, it is true, has sold 600 million iOS devices globally with its iTunes service and boasts 575 million user accounts—a trump card. It has the lump share of the US paid downloads market, and it made $4.3 billion from its music downloads in 2012 (of which $3.4 billion went to labels)¹². Pandora, for its part, has over 200 million users, with a number of them in Australia and New Zealand (for now, iRadio will launch only in the US).  Pandora is beginning to develop a global presence, but if Apple goes global with iRadio it may be no match for Pandora.¹³

Pandora, though, does have some wind in its sail.  It will make $600 million in ad sales in 2013, and has recently won spots on popular radio-ad platforms to tap the $15 billion market for terrestrial radio ads.  Apple still has to conquer that space, although it may care less about selling ads than Pandora does if its goal is to tie users to its platform and sell more devices.

Still, Pandora can also be used across mobile platforms, including Android. It is also the second most downloaded iPhone free app of all time, which means that Apple users already adopted Pandora for personal taste-based streaming^.  Finally, unless Apple releases a browser-based streaming platform for iTunes Radio, it is unlikely to capture those users that do not use iTunes.

By Dan Servantes

Endnotes

1. Kafka, Peter. “Apple Signs Sony Up for iRadio, Now Has All Three Major Music Labels on Board”. June 7, 2013. All Things D. http://allthingsd.com/20130607/apple-signs-sony-up-for-iradio-now-has-all-three-major-music-labels-on-board/

2. Blair, Nancy. “Apple’s iTunes Radio service: 3 things to know”. June 11, 2013. USA Today. http://www.usatoday.com/story/tech/personal/2013/06/11/apple-itunes-radio/2411867/

3. Budden, Robert; Cookson, Robert; Edgecliffe-Johnson, Andrew. “Apple’s ‘iRadio’ talks hit royalties snag” May 9, 2013. Financial Times. http://www.ft.com/intl/cms/s/0/b139ee3e-b8af-11e2-869f-00144feabdc0.html#axzz2V9ctQFkt

4. Peoples, Glen. “Apple Debuts iTunes Radio.” June 10, 2013. Billboard. http://www.billboard.com/biz/articles/news/digital-and-mobile/1566420/apple-debuts-itunes-radio

4. Kafka, Peter, loc.cit

5. Pham, Alex. “Warner Music Group Inks iRadio Deal for Publishing, Recorded-Music Licensing”. June 2, 2013. BillboardBiz. http://www.billboard.com/biz/articles/news/digital-and-mobile/1565596/warner-music-group-inks-iradio-deal-for-publishing

6. Pham, loc.cit

7. Pham, loc.cit

8. Houghton, Bruce. “We’ve Looked At The iTunes Radio Contract, And Apple Is One Sly Negotiator”. June 27, 2013. Hypebot. http://www.hypebot.com/hypebot/2013/06/weve-looked-at-the-itunes-radio-contract-and-apple-is-one-sly-negotiator.html

9. Resnikoff, Paul. “Confirmed: Apple Will Pay Indies $0.0013 Per iRadio Stream…”.  June 26, 2013. Digital Music News. http://www.digitalmusicnews.com/permalink/2013/20130628iradio13#D5Ote1ZpKl_23W9ZY1I8Hg

10. Buskirk, Eliot Van. “Merlin Remains Optimistic About Indies and iTunes Radio Despite Murky Situation”. June 21, 2013. evolver.fm. http://evolver.fm/2013/06/21/merlin-remains-optimistic-about-indies-and-itunes-radio-despite-murky-situation/

11. Listening In| Current and future options for streaming music”. Wall Street Journal. Pg. B5. June 11, 2013

12. Budden, loc.cit ^.

13. Mark Millian. “The Rest of the World Will Have to Wait for Apple’s iTunes Radio”. June 11, 2013. Bloomberg. http://www.bloomberg.com/news/2013-06-11/the-rest-of-the-world-will-have-to-wait-for-apple-s-itunes-radio.html

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