After iPhone 5 Release, Is Free Music Streaming Service Next Step For Apple?
Now that Apple's unveiled its new iPhone 5, what's next on the horizon for the tech giant? The iPad-mini? New Apple TV? Sources close to the company seem to indicate neither - it looks like Apple is ready to do battle with music streaming services.
Citing people familiar with the matter, The Wall Street Journal reported that Apple is ready to get into the music streaming game. The company reportedly wants to license music for a custom-radio service that would work on its hardware -- such as the iPhone, iPads and Mac computers -- in a bid to expand its dominance in online music. Apple's iTunes is the largest music retailer.
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In a move that could shake up the growing field of Internet radio, Apple plans to develop a service that would compete with the likes of Pandora Media, Spotify, and Sirius XM, and similar services by sending streams of music customized to users' tastes, according to The New York Times.
Apple, which has already dominated the field of digital music with its iTunes store, is in the early stages of negotiating with the major record labels for the service, and the full scope of its plans were not clear, according to these people, who asked not to be identified because the negotiations were private.
Apple's service would likely be a preinstalled "app" on Apple's devices like iPhones and iPads, and might be able to connect to users' iTunes account to judge their tastes, reported The New York Times.
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Apple previously tried and dropped the idea of internet radio due to the same reason, but it appears that this time around the company trying it differently
Apple will not make its radio service available on Android-based devices, thus limiting its potential subscriber base. However, it still does not mean that Pandora and other such services are out of the woods if Apple launches its service. Almost one-third of U.S. smartphones are iPhones and that makes it quite a sizable market. In addition, iPads & iPods which will also be capable of streaming Apple's radio service.
The main issue with internet radio service in the U.S. is the royalties. These royalties are fixed by intermediary bodies and internet webcasters do not have much flexibility regarding negotiation. This has made it difficult for Pandora to be profitable on its ad-based business.
Apple's entry can certainly affect Pandora's user base and listener hour growth. From Pandora's last earnings release, it is clear that overall registered user growth has slowed down significantly while active users continue to grow. Active users are all that matter for the company and indeed the main driver to our valuation for Pandora, and this will definitely slow down if Apple enters the internet radio arena. That said, right now it is unclear whether or not Apple plans to move ahead with a customizable radio service.
Most services that offer customized streams of music operate under limited licenses that restrict what they can do with the music, for example, limiting the number of times songs by particular artists can be played in an hour. But Apple is seeking direct licenses with record labels that would give the company more flexibility in using music, according to the people briefed on its plans.
Like Pandora, Apple's radio service would have advertising, carried through Apple's own platform. Whether Apple would then share part of the ad revenue with labels or pay them some other licensing fee is unclear. It's still also unclear whether Apple's service would be free or be a subscription service.
The move by Apple has confounded some analysts, who have noted that Internet radio business seems too small for Apple to bother with - Internet radio accounted for less than $1 billion a year in revenue in 2011, by some estimates. Still, the clout Apple's built up through iTunes could come to seem antiquated. As Megan Guess wrote on Ars Technica, "Apple's bid for a radio-streaming service might be a defensive measure against the growing popularity of Pandora and Spotify." But it might not, she said, "be a guaranteed money maker for the company" because Pandora has yet to report a profit.
As of news breaking on Apple's intentions, Pandora shares were down $1.77 in premarket trading from their closing price on Sept. 6 of $10.80.
Samsung recently launched an attack on iTunes with what it calls "Music Hub," a mobile music service designed for its latest line of Galaxy smartphones, and Nokia did as well with its free music streaming service in the U.S., Nokia Music. A new Apple streaming service could be seen as retaliation.
Samsung's announcement arrived two months ago, and it has had no material impact on either Pandora or Sirius XM's stock - just another example that Samsung is not Apple.
Apple initiated talks for a license with record companies only recently, The Wall Street Journal, and it could be months before a service is launched.