iTunes Radio: Apple’s Dark Horse for Streaming Music

on August 26, 2013
Reading Time: 7 minutes

After Apple’s keynote at WWDC 2013, all anyone could talk about was iOS 7. “It’s so different,” they gasped and everyone carried on about it for weeks. Unfortunately, they disregarded another important announcement from the event: iTunes Radio, the company’s foray into online music streaming.

Ask Pandora CEO Joe Kennedy about it and he’ll tell you he isn’t worried one bit:

“We’ve now been around for eight years. We’ve seen competitors large and small enter the market and, in some cases, exit the market […] I’ve never seen an analysis that identifies an effect from any competitor … we don’t see the picture changing.”

We’ve heard this before. BlackBerry neé RIM, Nokia, and Microsoft all shrugged off Apple’s iPhone when it was first announced and look how well that went.

Competitors are quick to write off Apple as a mild nuisance until it proves itself as not only a worthy adversary, but an industry-changing one. It happened with the iPod, the iPhone, the MacBook Air, and the iPad. On the services side, iTunes influenced Best Buy, Wal Mart, Microsoft, Nokia, Google, and many others to open their own music stores. Why should iTunes Radio be any different?

Pandora has three things to worry about with iTunes Radio coming up the walkway:

  • Innovation
  • Expansion
  • Revenue

Innovation

Apple didn’t just decide to clone Pandora and offer another streaming service to confuse users. iTunes Radio offers numerous new features, aside from a recommendation engine powered by a user base of millions.

Like Pandora, iTunes Radio tracks what a person listens to over the air. However, it can also see what he or she downloads from iTunes. If the team behind iTunes Radio thinks the way other online radio listeners do, they’ll know what to stream based on that listener’s downloads. Online radio is a discovery and testing ground, but our libraries are for keeps. The more music we hear that’s like the music we own, the more we’ll use the service, leading to more purchases on iTunes. And because it will have access to years of previous iTunes purchases, it means fine tuning a station won’t have to be done from scratch the way it is with Pandora. iTunes Radio will know a listener’s tastes from day one.

Pandora still offers a very powerful recommendation service and is available on countless devices, like the Roku set-top box, Apple TV, certain car audio systems, and through its mobile apps, but has there been growth? Aside from its ubiquity, Pandora hasn’t changed much since 2007. iTunes Radio allows for finer tuning of personal stations, while Pandora only gives users the “thumb” buttons to determine “good” and “bad” for current tracks. iTunes Radio suggests full stations and genres, like “Dance Party” or “Summer Country” or “Trending on Twitter”, while Pandora languishes, waiting for you to tell it what to play. The addition of Siri to iTunes Radio lets users simply tell it to play a particular station or genre without having to type it in. That’s good news for car listeners. Even in beta, iTunes Radio shows more potential than Pandora.

From a service standpoint, Pandora has remained stagnant, resting on its laurels without a true competitor to challenge it. Spotify and Rdio are popular services for people who know what they want to listen to (and they do have their own discovery capabilities, as well), but Pandora has remained king for those times when we don’t know what we want to hear. When we think “discovery”, we tend to think “Pandora”.

For now.

Expansion

As stated before, Pandora is widely available on a variety of devices and vehicles, but presence isn’t what’s key here. There needs to be a compelling reason to keep people coming back. Due to competitors like Spotify, iHeartRadio, and Rdio, Pandora recently lost some of its radio market share and with the introduction of iTunes Radio in the coming weeks, we should expect to see that share drop even more.

iTunes Radio will be built into every device running iOS 7 and the next iTunes update beginning this fall. Millions of Apple TV, iPad, iPod Touch, iPhone, and Mac users will be able to stream to their devices automatically without any additional accounts or software needed. Pandora is ubiquitous. iTunes Radio is seamless.

Apple’s push into motor vehicles with its iOS in the Car initiative will also give iTunes Radio an even bigger boost by incorporating it directly into the car’s computer system. Imagine heading out for your daily commute and accessing your own personalized radio station with the controls only a few inches (or a voice command) away, then carrying that station with you out of the car without having to reload it or lose your spot in a song.

At launch, iTunes Radio will be available in only the United States with thousands of songs from the iTunes Store behind it. This might sound like a problem, but Pandora hasn’t fared much better. It’s only available in the U.S., New Zealand, and Australia.

Considering Apple’s weight and influence in the music industry, I doubt iTunes Radio will remain exclusive for long. The U.S. is a large enough audience to gain traction and small enough for Apple to work out any kinks before going international. If you remember back in December 2003, the iTunes Store debuted only in the U.S. originally. One year later, it arrived in three new countries. Four months after that, nine more countries were added and it’s been growing exponentially ever since. iTunes Radio may spread even faster and I anticipate it will.

Apple’s radio service won’t find its way to Blu Ray players or TiVos, but it doesn’t have to in order to be successful. With over 300 million iOS devices in circulation all over the world, it’ll have plenty of reach, which means even more money in its coffers.

Revenue

A few months ago, musician David Lowery revealed the woes of doing business with Pandora, claiming “My Song Got Played On Pandora 1 Million Times and All I Got Was $16.89, Less Than What I Make From a Single T-Shirt Sale!“. His story was debunked rather quickly by Michael DeGusta, armed only with a blog and basic math. DeGusta calculated that Lowery actually made $1,370 for his million plays on Pandora. Still not a great amount, but it’s not $17 either.

Unfortunately, according to Mark Rogowsky at Forbes that number isn’t going to get any better:

Pandora doesn’t make much money because it pays out a huge portion of revenues to record companies. That number at last is headed strongly in the right directly. It was roughly 52% of total revenues on the quarter against nearly 60% last year. This is huge progress, but the company didn’t have much to say about it, suggesting future improvement is likely to be minimal.

Apple, on the other hand, has bigger plans for its artists:

During iTunes Radio’s first year, Apple will pay a label 0.13 cents each time a song is played, as well as 15% of net advertising revenue, proportionate to a given label’s share of the music played on iTunes. In the second year, that bumps up to 0.14 cents per listen, plus 19% of ad revenue.

That compares to the 0.12 cents Pandora pays labels per listen on its free service. Apple is also offering music publishers more than twice as much in royalties than Pandora does.

Pandora’s struggles both in innovation and international expansion are most likely affected by its lack of profitability. When nearly 60% of a company’s quarterly revenue is being paid to record companies and the remaining 40% has to be split over employees and other overhead costs, what else is left to spend on R&D and licensing?

This isn’t helped by the recent decision to lift the 40-hour playing limit for free members. If Pandora One users don’t have to pay for unlimited use, why not just drop down to the free tier and sit through an ad every few songs?

Apple is making iTunes Radio free ad-supported for all users with an ad-free option for iTunes Match subscribers. For $25 a year, listeners will get iTunes Radio without any ads, as well as access to their iTunes libraries stored in the cloud from any device. Not a bad deal when compared with Pandora’s annual $36 fee for better streaming quality, no ads, and “custom skins”.

And let’s not forget the additional revenue generated by iTunes Radio’s direct integration with the iTunes Store. Like what you’re hearing? Buy it immediately without interrupting the current song or leaving the app. Quick access like that means a more pleasant (and widely used) checkout process for consumers and more money in Apple’s pocket, regardless of whether they paid for iTunes Match or not.

To clarify:

  • Bought a song while listening to iTunes Radio? Apple and the artist make money.
  • Paid for iTunes Match and listen to iTunes Radio? Apple and the artist make money.
  • Clicked on an ad in iTunes Radio? Apple, the advertiser, and the artist make money.

Noticing a pattern?

The Future

It’s not enough to just have a presence on numerous devices if a business like Pandora wants to be successful, especially when there are other competitors breathing down its neck. Spotify, Rdio, iHeartRadio are gaining steam and with iTunes Radio entering the fray, the threat’s as great as it’s ever been.

Apple has the money and the clout to do what it wants to do and go where it wants to go. It has 575 million iTunes users across the globe and hundreds of millions of devices in the hands of waiting listeners. It can afford to pay labels and artists better than Pandora currently does and there’s a plan in place to increase earnings further along down the road. How long before it branches out with an on-demand subscription service like Spotify?

When iTunes Radio was announced at WWDC 2013, it was talked about like just another feature among a long list of more important, flashier ones, and perhaps that was deliberate–look at the new shiny iOS and pay no attention to the streaming service jammed in the middle of the presentation. Apple’s known for releasing some major dogs of online services, like Ping and MobileMe, and it’s possible it didn’t want iTunes Radio to be seen in the same light.

Or, much like the Apple TV began as a “hobby” and a small part of Apple’s entrance into television, so too will iTunes Radio begin as a tiny step towards a new era of music commerce. Apple has the luxury of not expecting much from iTunes Radio for a long time. It makes the majority of its money on hardware sales, not from what’s sold on iTunes, so it can pump as much or as little as it wants into iTunes Radio over the next few years without worrying about which direction the needle is moving.

So, what does this all come down to? The people want music. No, they want their music, the songs they love and the ones they don’t know about yet. Most importantly, they want their music their way and as conveniently as possible and iTunes Radio is going to give it to them in a way Pandora currently cannot.

There’s still time before iTunes Radio hits the market and I’d wager there’s a little more time before it really gains some ground, but if Pandora wants to keep up, it needs to figure out its next step because Apple’s already three ahead.