From The Magazine: Will iTunes Radio Pay Off?

This story on Apple's business model for its just-launched iTunes Radio is from the latest edition of Billboard (cover date June 22, 2013). Also featured in this issue: a look at Pandora's terrestrial radio purchase; the declining value of certified gold singles; Pandora chief revenue officer John Trimble's day; Questions Answered with RIAA chairman/CEO Cary Sherman; the Billboard cover story on Miley Cyrus (who's already sold some 14 million albums); in-depth analysis on increasing the digital services market; and much more. Pick up this issue of Billboard here and subscribe to Billboard here.

After nearly a year of speculation, rumor and talks, Apple finally unveiled iTunes Radio, a Pandora-like service that will be funded by advertising revenue and let users build their own listening stations based on chosen songs/artists plus each user’s iTunes buying history and iCloud account.

ITunes Radio isn’t just a Pandora copy, which already has a major head start with 70 million users every month. For example, it’ll allow labels to pitch music that can fit with a user’s choices, and iTunes Radio will come with a “buy” button, which labels hope will spur iTunes sales.

Apple Debuts iTunes Radio

The new Apple service will ultimately pay out more dollars to the labels and publishers than Pandora, according to sources.

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On the recorded-music side, sources say Apple has agreed to carve out two buckets of revenue and whichever is higher will be where payments come from. In one bucket, Apple will store 10%-20% of ad revenue to cover its costs in lining up advertising and then split the remainder evenly with the labels. In the other bucket, Apple will pay slightly more than the pure-play rate that Pandora pays, which is $0.0012 per song stream. Some sources peg that number at $0.00125-$0.0013 per stream, but that bucket will also have a sliver of an undisclosed amount of ad revenue added to it.

But the ad-revenue bucket may be shortchanged if Apple takes a loss-leader approach to its service, in the hope that it’ll help sell more iPhones and iPads.

Billboard did an informal survey of music industry executives on whether iTunes Radio will have a big impact on Pandora and couldn’t find any willing to bet against Apple. But none were willing to write off Pandora either.

“If you are Pandora, you have such a huge head start,” one major-label executive says. But he wonders how many users will change services just because it’s Apple.

Apple’s music library also has 26 million songs versus 1 million at Pandora, although the iPhone maker will still have to do an aggressive round of licensing in order to be able to offer all those songs on its new service.

While it has cut deals with both the publishing and -recorded-music sides of Warner Music Group, Sony Music Entertainment, Sony/ATV Music Publishing and Universal Music Group’s recorded-music division, it still needs to do so with Universal Music Publishing Group, BMG, Kobalt (which, according to ASCAP, has notified the performing rights organization that it’s withdrawing its digital rights as of July 1), the three PROs (ASCAP, BMI and SESAC) and thousands of independent labels.

Apple says it’s working on getting indies signed up. “We expect to have the largest catalog of music offered by any Internet radio service when we launch in the fall,” spokesman Tom Neumayr says.

While Pandora enjoys the first-mover advantage, another label executive says Apple followers will all try the new service, which could affect Pandora. But, “Apple better get it right, right out of the box, because if people try them and it’s not as listener-friendly as Pandora, they’ll go back to Pandora and probably not bother to try Apple again down the road, after they work out the bugs.”

In its presentation at the Apple Worldwide Developers Conference on June 10, Apple senior VP of Internet software and services Eddy Cue told the audience that in addition to allowing customers to build their own channel, iTunes Radio would launch with hundreds of genre-based playlists, including “summer songs” and “’80s dance party music,” and even artist-based stations like one built around Led Zeppelin, according to a video of the WWDC on Apple’s website.

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