Apple Radio: The Next Big Thing?

It’s not too much to say that Apple Inc. (NASDAQ: AAPL) changed the music business when it released its first iPod in 2001. Selling single tracks for less than a dollar absolutely cannibalized CD sales.

Now that music industry executives have figured out a way to recapture some of those lost revenues, Apple is reportedly talking with the execs about offering a streaming radio service similar to that offered by Pandora Media Inc. (NYSE: P). Pandora is an advertising supported service that creates a playlist based on a user’s selections. Another streaming music model that now includes a Pandora-like streaming radio service is privately held Spotify’s subscription model.

According to the Wall Street Journal, Apple already has spurned the Spotify model and is interested in the Pandora model as an additional channel for the company’s iAds advertising platform. That makes some sense because Apple is essentially nowhere in mobile advertising, even though its iPhone commands a significant share of the smartphone market and its iPad dominates the tablet space.

Here’s a chart from eMarketer showing the top mobile ad platforms:

The $2.6 billion in 2012 revenue may not be worth Apple’s time, but a near tripling of revenue in just two years surely got the company’s attention.

Apple is believed to be negotiating for different licensing terms than the so-called compulsory license that Pandora operates under because Apple would like to offer a more robust service than Pandora’s. The music rights holders, which have seen profits begin to trickle in from streaming services, may not be quite so demanding of Apple as it is of Pandora or Spotify. After all, Apple claims 400 million iTunes accounts. Even the music mavens won’t miss a target that size.

Pandora’s shares are getting hammered this morning, down 15% in the premarket to $10.70 in a 52-week range of $7.83 to $15.98. Apple’s shares are up fractionally.

Paul Ausick