Apple haggling with labels over iRadio service

Apple reportedly offers to pay record labels a royalty rate half of what Pandora pays for proposed music streaming service

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These days many Apple-watchers are busy trying to figure out when the next version of the iPhone or iPad will be released, or when the iWatch is coming out. There’s another rumored Apple offering, though, that gets less attention, but which some of us are keeping an eye on: Apple’s streaming music service, usually referred to as the iRadio. Last week brought some interesting news on that front.

Apple VP Eddy Cue is leading the negotiations with labels

Image credit: REUTERS/Brendan McDermid

First, some background: according to the rumors, iRadio would be a free, ad-supported music streaming service, along the lines of Pandora or Spotify. As I wrote last October, Apple was in the process of negotiating licensing deals directly with music labels. The goal was (and still is) to get the labels to agree to lower performance royalty rates than the statutory rates defined by the Copyright Royalty Board (CRB). Performance royalties are paid to owners of sound recordings when those recordings are digitally transmitted (i.e., streamed); each “performance” or transmission of a song to a single user results in a royalty payment. 

At the time I wrote that piece, iRadio was expected to launch in early 2013. That clearly hasn’t happened, and last week a New York Post article told us why: Apple still hasn’t reached an agreement with any record labels yet. According to the Post sources, Apple has offered to a pay a rate of $.0006 per performance, or 6 cents for every 100 songs streamed, which the labels have rejected. That’s half of what Pandora currently pays, $.0012 per performance, which is the rate paid by large pureplay streamers, and less than a third of the statutory rate for commercial webcasters of $.0021 per performance set by the CRB.

Why would the labels even consider letting Apple pay lower royalty rates? Well, for one thing, an Apple streaming service would obviously be popular and generate new listeners and royalties. More importantly, though, as CNET reported in October, is that the labels would also want a piece of Apple’s iRadio ad revenue. There’s no mention in the Post article about what percentage of ad revenue (if any) Apple has offered the labels. Without that piece of information it’s hard to say how far apart the sides really are.

Last week also brought us news from Pandora, the undisputed king of music streaming, that illustrates why securing a lower royalty rate is, from Apple’s perspective, key to making an iRadio service viable. On the surface, the numbers look great: for the fiscal quarter ending January 31, Pandora reported revenues of $125 million, up 54 percent over the same period the previous year, total listener hours of 4.05 billion, up 53 percent, and claimed 8 percent of the total radio listener market in the U.S. But, content acquisition costs (i.e., royalty payments) grew faster than revenues, up 59% last quarter to $77 million, which is more than 60% of revenue. That’s not an equation for long term survival and may have contributed to longtime Pandora CEO Joseph Kennedy’s decision to step down last week.

Given those kinds of numbers, you can see why Apple is lowballing the labels in an effort to get the best rate it can before launching iRadio. Sooner or later a deal will most likely get done based on a mix of royalty rates and a percentage of ad revenue. But, it still remains to be seen whether you’ll be able to listen to iRadio on your new iPhone 5s later this year.

Read more of Phil Johnson's #Tech blog and follow the latest IT news at ITworld. Follow Phil on Twitter at @itwphiljohnson. For the latest IT news, analysis and how-tos, follow ITworld on Twitter and Facebook.

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