Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions
Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

Apple is in negotiations with rights holders for an Internet radio service similar to Pandora, according to reports in the Wall Street Journal and the New York Times. It appears Apple executives spot a hole in the needs of their consumers and the capabilities of their products. I think they're right.

No Apple foray into music is a slum dunk. But given the company's track record in music and its commanding market position in mobile handsets and technology, Apple could become a major player - it could even dominate or reinvent Internet radio. No acquisitions have been made public - Apple's purchase of SoundJam in 2000 preceded iTunes, and its purchase of Lala.com in 2009 preceded iTunes Match - so don't expect Apple to build from scratch any time soon.

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Internet radio is still a young market and ready for disruption. Here are five reasons why Apple would want to be in the Internet radio business.

1. This would be a smart preemptive move against Google, subscription services and other Internet radio services. Apple dominates digital downloads but has yet to create another killer music app since the iTunes Music Store. The company has long been wary of the subscription model and has ventured into the access model only to the extent of iTunes Match and iCloud. Apple has fallen behind and Internet radio has become a mainstream product enjoyed by both heavy and light music fans. Subscription services are slowly beginning to improve their radio functions because of radio's appeal.

Other technology companies must see the same gap -- it's that obvious. Google would be wise to build an Internet radio service into its cloud-based Google Music service. Amazon could use Internet radio to push its MP3 specials and keep people shopping (it could do wonderful things with Songza). Bottom line: Apple would need to build its Internet radio service sooner or later.

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2. Apple can quickly take the service international. A literal reading of the reports tells us that Apple is in talks with rights holders to license music for the service. A U.S.-only service could operate with a statutory license and without negotiations, but Apple would need to negotiate licenses to take the service to other countries.

The company's deep pockets give it an advantage here. Pandora just managed to get to Australia and New Zealand in June. Clear Channel's iHeartRadio seems destined never to leave these shores. And Apple's boots on the ground in markets around the world give it the ability to tweak the product for specific markets.

Going international also gives Apple an opportunity - as long as one is negotiating - to offer special features such as unlimited skipping and song caching that are prohibited from U.S. webcasters by the DMCA. Caching would be a plus for Apple - SiriusXM now offers it.

3. Apple already has an ad network. An Internet radio service needs to generate revenue, and Apple could generate revenue through its iAd platform; its network currently runs ads in the U.S., Japan, Italy, Spain, France, Germany and the U.K. (which happen to be seven of the larger music markets in the world). Extra features will cost more than standard webcasting royalties, however, so Apple may need other revenue if an Internet radio service is to be a standalone profit center.

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4. Apple can plug a new music product into an energized customer base. Apple has a huge install base of iOS devices: 410 million iPhone, iPad and iPod Touches worldwide at the end of June http://seekingalpha.com/article/745271-apple-s-ceo-discusses-f3q12-results-earnings-call-transcript?part=single. iTunes is available in 155 countries, giving Apple an ability to turn an Internet radio service into a sales driven for its iTunes music store.

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5. Apple could launch a very good Internet radio service without Pandora's years of experience. Pandora CEO Joe Kennedy has told me many times that Internet radio is "wickedly hard," and he may be right. But even to this music snob, it's becoming difficult to tell the difference between Pandora and competing services. They play roughly the same songs and do roughly the same job meeting my expectations. With the exception of Clear Channel's iHeartRadio, Pandora has been fortunate that mainly small companies have taken advantage of the low barriers to entry in Internet radio. But that could soon change.

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