There’s no need to speculate any more. Now, it’s official. Apple Inc. (NASDAQ:AAPL) is launching a music streaming service called iTunes Radio. The company announced the new service on Monday at its World Wide Developers’ Conference along with new mobile and desktop operating systems. The iTunes Radio is expected to launch in the U.S. sometime this Fall. Apple Inc. (NASDAQ:AAPL) is joining the radio space after rival Google Inc (NASDAQ:GOOG) decided to launch its own music application.
Very interestingly, rather than embrace Apple Inc. (NASDAQ:AAPL) and downplay Pandora Media Inc (NYSE:P) and Google Inc (NASDAQ:GOOG), Apple’s main rivals in the radio and music space, the market reacted quite the opposite. Shares of Apple fell about 1% while Pandora’s and Google’s have gained 2.5% and 1.25%, respectively.
On music and financials
Making money from music to the masses is an extremely strenuous task. You have to walk on a very tight rope between the artist, the record company and the technology company that makes the music device. You’ve got plenty of examples when it really isn’t clear who deserves to get paid and how much. If a listener began playing a song and then skipped it, which party should receive the royalties from that song? It’s no wonder that it took Steve Jobs seven years to launch iTunes. The majority of which was devoted to solving legal and business disputes between the aforementioned parties. So how is the iTunes Radio going to bring in money for Apple Inc. (NASDAQ:AAPL)?
The business model
The new iTunes Radio allows users access, for free, to ad-supported streaming music. However, it will be sans ads for those who subscribe to
iTunes
Match, which is a paid service-costing $24.99 a year that enables users to store all their content in Apple Inc. (NASDAQ:AAPL)‘s iCloud. In simple words, Apple either makes money from adds or from a continued ongoing customer relationship. That’s smart. But more than just another source of income, the new feature will give a few points to Apple in its mighty fight against Google , its real competitor. First, by adding new services, Apple is seeking to blunt the advance of Google Inc (NASDAQ:GOOG)’s Android mobile operating system, which now runs on 74 percent of smartphones, compared with Apple Inc. (NASDAQ:AAPL)’s 18 percent in the first quarter, according to research-firm Gartner. Second, it will compete head to head against Google’s “All Access.” Google recently launched a music paid subscription service competing with the likes of Rhapsody, Rdio and Spotify, but has not entered the free, advertiser-supported streaming radio business.
When asked how Apple’s new feature will impact their business, Pandora Media Inc (NYSE:P) responded with the following statement:
“Apple’s new feature is an evolution of their iTunes offering to bring it on par with other streaming music services that have added radio into their feature sets. We have spent the last 13 years singularly focused on redefining radio and benefit from unrivaled intellectual property, deep experience in delivering personalized play lists, and ubiquitous product availability across every platform. We make it effortless for our more than 200 million registered users to connect with the music they love anytime, anywhere,”
To me, it sounds very ironic that Pandora is downplaying Apple’s new entrance to the radio space. In Pandora’s case, advertising makes up about 87% of sales. The rest comes through premium Pandora One subscriptions. Pandora One is Pandora with no ads and better sound quality, and it costs $4 per month. But it has plenty of competition in Spotify, Grooveshark, Sirius XM Radio Inc (NASDAQ:SIRI), and even iTunes. And, most importantly, you can use its products for free without ever having to cough up a penny. I love music, and I want to love Pandora. I could see some users becoming addicted to it, the way you might to a favorite radio station or TV show or computer game. But if it’s not making money now – with over 200 million registered users – will it ever?
Pandora Media Inc (NYSE:P) generated $138 million in revenue last year, but like many of the other social media companies it failed to turn a profit. And that’s because it doesn’t have a profitable business model like Apple and Google.
The Fool listens ahead
I believe the market is dead wrong about downplaying Apple’s move to the radio space, and endorsing Pandora instead. If history is any guide, Apple will flourish while Pandora will be completely wiped out. This should be music to the ears of Apple’s shareholders.
Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Is Music to the Ears of Apple Shareholders originally appeared on Fool.com is written by Shmulik Karpf.
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