As the June 10 opening of the four-day Apple Worldwide Developers Conference neared at press time, Apple appeared to be in the final stages of signing up the major music companies for its planned music streaming service.
While Apple so far has inked deals with both the recorded-music and publishing operations of Warner Music and Universal Music Group, sources say Sony Music Entertainment and Sony/ATV are close to an agreement, but still haggling over rates.
The holdup on Sony’s recorded side appears to be over Apple’s proposal that it not pay if listeners skip a song from iRadio’s programming. (Pandora pays on skips.) For publishers, Apple is agreeing to pay 10% of advertising revenue to music publishers, a share that Sony/ATV chairman/CEO Martin Bandier has been fighting for, but only as an introductory rate. In other words, the length of the contract and escalating rates might be part of the discussion.
Meanwhile, Warner/Chappell has reportedly agreed to the 10% rate, which is more than double the 4.1% rate Pandora pays publishers. When Sony/ATV pulled its digital rights from ASCAP and BMI, it negotiated a 5% rate, or nearly a 25% increase over the combined rates Pandora is paying to the two performing rights organizations and SESAC. At the time, Bandier also described that rate as an introductory rate.
The proposed iTunes digital offering has been described as a hybrid, Pandora-like service that will allow users to build their own listening stations informed by whatever song or artist is chosen, plus each user’s iTunes buying history and iCloud account. But in another important distinction, it will also allow labels to pitch music that can fit in with user’s choices. Finally, iRadio will come with a “buy” button, which labels hope will spur iTunes sales.
The service will be ad-supported, a new twist for Apple. In putting together direct deals with the major music companies, Apple has proposed a pay model based on whichever is greater of two revenue buckets. For the advertising bucket, iTunes has proposed a 50/50 split after 10%-20% is deducted to cover the cost of bringing in advertising. In its per-play/per-listener bucket, Apple is proposing to pay slightly higher than the $0.0012 Copyright Royalty Board-determined statutory rate that Pandora pays. Depending on who you ask, Apple will pay $0.00125 or $0.0013 as part of its per-stream rate, which will also have an undisclosed percentage of advertising revenue sprinkled on top. Some press reports, however, put the per-stream rate at $0.0016.
Apple appears to be holding out for the advantage of not paying on skips. It’s a sticking point for Sony, but possibly not a permanent one. One executive familiar with the negotiations says the advance money that Apple is offering–the amount of which Billboard was unable to determine–is substantial enough to mitigate this problem, and potentially makes the rate Apple pays higher than that of Pandora.
Known as a fierce negotiator, Apple has long dictated rules to the music industry. But sources say there’s a new eagerness–and flexibility–when it comes to getting iRadio in place.
“They will be remiss if they don’t do a deal now,” one executive says. “Sometimes when you are introducing a new product, your costs might be higher than anticipated, but in the long term this service could become a great way for them to sell more iPhones and maybe sell more downloads for everyone. They have a history of building services that are friendly and intuitive, and while this ad-supported service is a new area for them, it could be a toe in the water that will lead to other big things for them.”
Another executive agrees, saying Apple needs this deal now in order to help offset the competitive threat to its iPhone posed by Google’s Android, which has claimed 52% of subscribers in the smartphone market versus Apple’s iOS, at 39.2%, between February and April, according to comScore.