Apple Joins the Fast-Growing Online Radio and Music Streaming World

Americans streamed nearly 22 billion songs in the first quarter of 2013, and the number is sure to rise as more people subscribe to various services. Pandora Media Inc. (NYSE: P), iHeartRadio from Clear Channel Communications, Spotify, Rhapsody and Slacker Radio are among the most popular Internet radio apps, and all posted at least double-digit growth in 2012. iHeartRadio more than doubled its user base in that year and Spotify grew by 91% to lead the pack, according to a recent survey by Nielsen.

More than a quarter of connected device (smartphones, tablets) owners are most likely to use their devices to stream music from their smartphones. From Apple’s point of view, if it can get these users — many of whom own and use iPhones — to stream iTunes Radio, then Apple and its music industry partners will be well positioned to sell more songs from the iTunes store.

According to Nielsen’s U.S. Entertainment Consumer Report, 29% of consumers are more likely to purchase new music after hearing it through a streaming service. Physical CDs saw a drop of about 13.5% in sales between 2011 and 2012, while digital album sales jumped 14% and digital singles sales rose 5%. Digital singles, however, accounted for 1.34 billion of the total 1.66 billion units in music industry sales in 2012.

In the new world of streaming music, singles rule. This puts a lot of pressure on the music industry, reliant as it is on album sales. The industry posted its first profit since 1999 last year — a scant 0.3% on sales of $16.5 billion. Streaming music serves as both a way for listeners to hear the songs they like and to discover new songs and artists.

Converting those likes into more sales, or higher licensing fees, are the two main ways the music industry can grow. As music services proliferate — Google Inc. (NASDAQ: GOOG) also has a streaming service now — the industry would be well served to go after more sales, keeping licensing fees low. That would seem to be Apple’s approach as it kicks out its iTunes Radio and chases a bigger piece of the $16.5 billion pie.