Apple's iRadio Blossoms Into Internet Radio Market

Apple's Sept. 12 rollout of its sleek new iPhone 5, upgraded iPod Nano and Touch models, and long overdue relaunch of its iTunes stores was all good news to the music industry's ears.

But the company was conspicuously quiet about its plans to invade the Internet custom radio space, currently occupied by Pandora, Slacker and Clear Channel's iHeartRadio. That initiative -- first revealed Sept. 7 by the Wall Street Journal -- startled the music industry, mainly because Apple had yet to discuss its plans with all the majors, let alone its independent music partners. But since then, Apple has called the major players it had yet to brief, and consequently more details are starting to emerge. Initial reports indicated that Apple planned to cut direct deals with labels for rights and royalty rates, which would allow it to operate a custom radio streaming service with more bells and whistles than Pandora and iHeartRadio offer. But it now appears that Apple is starting with the parameters of a compulsory license and then negotiating waivers to certain elements mandated under the Digital Millennium Copyright Act (DMCA) in order to obtain the interactive features and the rates it wants. 

"The way these types of negotiations work is that you usually file for a compulsory license and then work backwards to cut a direct deal," says one executive familiar with these negotiations.

So far, Apple has presented its broad idea to some labels, and now executives on both sides are discussing what/if scenarios for characteristics they want to include in their custom radio business model, to ascertain if what they want to do would remain compliant with the DMCA. Sources say the labels are willing to accommodate some compulsory license waivers -- as they have in the past for other services -- but they want to make sure that whatever waivers Apple receives can also be rolled out to other custom Web radio operators. Also, they want to ensure that the deals aren't viewed by the Copyright Royalty Board as a market deal to be incorporated into the next set of CRB rate settings, because they don't want their concessions to come back to haunt them.

STREAMS OF REVENUE AND MUSIC

Whatever licensing route Apple pursues, the labels want at least two features included in the company's custom Internet radio service, according to executives at two of the majors. First, the labels want a strong tie-back to the iTunes store in the hopes that Apple's Internet radio can stimulate sales and grow the music industry's revenue stream, not cannibalize it. Second, the labels are looking for the ability to program priority tracks that fit a user's profile, something that they can't do with Pandora.

According to sources, both of these features are part of Apple's thinking as it examines ways to improve the consumer experience in programming custom stations beyond the options Pandora offers. Regarding growing revenue, Apple apparently believes it can dominate this space pretty quickly, even with Pandora's head start, given its 335 million iPods, iPads and iPhones, and its iTunes global customer base of 465 million, according to an Apple spokesman, who declined to comment further. That should drive royalties from customer radio service, but what about downloads?

Whatever it does to try stimulating iTunes sales, it'll need "more than a buy button," one major-label executive says. "Pandora already has that, and it hardly generates any sales."

As for helping labels push priority tracks to listeners, Apple's custom radio programming will reportedly rely on its Genius technology, which makes recommendations utilizing a combination of shared musical elements, customer tastes (gathered from data collected from users' iTunes library, purchases and sampling in the iTunes store and songs cached in the company's iMatch cloud) and music from customers with similar listening preferences. As part of that process, Apple may also let labels shop for certain kinds of music fans and insert songs that it wants to push and that will fit into targeted users' custom station playlists.

One independent label yet to briefed by iTunes on the service wonders if labels will be allowed to market songs to consumers on a geographic basis, since many indie bands still build their audience market by market.