Apple Music Streaming Service Stalled in Per-Song Rights Fee Talks with Sony/ATV
We first started hearing murmurs of Apple's intentions to enter the Internet music streaming service game around the time of the company's big iPhone 5 event, and now it seems we may be waiting a little longer than expected. Speaking to a "source close to the situation," Sony/ATV, the world's largest music publisher, and Apple can't reach an agreement on a per-song rights fee, according to the New York Post.
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Such rights are usually a fraction of a cent per stream, but Sony/ATV was allegedly seeking a higher royalty rate from Apple.
Apple is seeking far more flexible licensing than the agreements Pandora, the current dominant Internet radio service, has managed to arrange. Apple's licenses would allow users to play a selected artist more times than Pandora, and would allow the company to point people to the iTunes Store to generate music sales.
Apple justified its demand for lower fees by explaining that its proposed service would be more flexible to the desires of the publishers, playing songs that publishers wanted to promote at the time, instead of relying solely on the listener's musical preferences, as Pandora claims to do.
"While Pandora serves up songs based on algorithms, Apple's talks with the labels involves an element of promotion based on what music labels are pushing in any one month, sources said," the New York Post reported.
Further complicating the situation is the fact that Sony/ATV is about to pull out of the two primary copyright associations, Ascap and BMI, in January 2013. Once removed from the associations, streaming music services like Pandora, and the one proposed by Apple, will have to unilaterally negotiate with the publisher, making it more difficult, and likely more costly, to secure streaming rights.
Citing people who are familiar with the matter, The Wall Street Journal first reported that Apple was ready to get into the music streaming game earlier this month.
Apple hoped to have the service ready to launch alongside the iPhone 5, but the difficult negotiations delayed its debut, said sources close to the matter.
Apple wants to license music for a custom-radio service that would work on its iOS and on virtual stations to play music on a Web browser in a bid to expand its dominance in online music.
Apple's iTunes is the largest music retailer. Creating a music streaming service could seriously 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. Advertisements from Apple's iAd platform are expected to be incorporated into the service in exchange for free user access.
Android-based devices will not have access to Apple's radio service, 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.
The main issue with Internet radio service in the U.S. is the royalties. Intermediary bodies fix these royalties 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.
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.
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.
News of Apple's intent seems to have had a tangible effect on the market, as the day that The Wall Street Journal first reported the news Pandora shares were down $1.77 in premarket trading from their closing price on Sept. 6 of $10.80.