Peter Kafka

Recent Posts by Peter Kafka

Apple Wants to Build Its Own Pandora. Why?

Apple is talking to the music labels about a streaming music service along the lines of Pandora, says The Wall Street Journal. Industry sources I’ve talked to say that’s correct.

And unlike Apple’s long-running but unsuccessful negotiations with the TV Industrial Complex, this one is easy to imagine getting off the ground.

The gist:

  • Apple could launch a Pandora clone tomorrow without the labels’ permission, because if it wanted to do a straightforward “Web radio” service, it could use the same compulsory licenses that Pandora and other Web radio services use.
  • Apple will want more flexibility than those licenses provide, so it will need the labels’ permission for that. That’s not a slam dunk, but it’s quite doable, because the music industry has become a lot more flexible in the past few years. That’s what happens to an industry after a decade-plus of staggering decline.
  • And in any case, the labels are happy to cut deals with Apple. Label chiefs used to blame Apple and its iTunes store for part of their decline, but they’ve gotten over that. And they like generating additional revenue streams.

The bigger question is why Apple would want to launch a streaming music service — particularly an ad-supported one like the Journal describes.

That’s because ad-supported streaming music is a pretty lousy business. It costs a lot of money, and there doesn’t seem to be a whole lot of upside in it. Pandora, the market leader, struggles to make a profit, and it has been at it for years.

The big problem for streaming services is that, unlike other Internet businesses, scale only gets you so far here: Every time Pandora or any other streaming service plays a song, it has to write the labels and other copyright holders a check, and there’s no way off that treadmill. Last quarter, Pandora shoveled nearly 60 percent of its revenue out the door to content holders.

Meanwhile, Apple is supposedly asking for more permissive licenses than the ones Pandora gets — ones that would let you play the same song multiple times, for instance — and those should cost more than the ones Pandora has.

Follow that logic, and you have to conclude that Apple executives have two ideas, which aren’t mutually exclusive:

  • We can do a much better job at selling ads than Pandora – we have iAd!
  • Even if we can’t make money, it’s worth having our own streaming service.

The first one is hard to imagine: Again, Pandora has been at this for a while, tackling the messy — and very local — audio ad market with a lot of feet on the street. Not very Apple-like.

And even Tim Cook can’t argue that Apple has put a lot of resources into iAd since it acquired mobile ad start-up Quattro in 2010. People familiar with the company say one big problem the iAd unit has had internally is explaining how they can become a meaningful business — as in, a billion dollars a year — and I don’t see how Web radio ads solves that for them.

The second argument makes a bit more sense: Perhaps an Apple-branded streaming service is enough to keep an iPhone or iPad user from jumping ship to rivals like Samsung, Google or Amazon.

And if Apple thought it could help sell hardware, it could certainly afford to throw money at the project. Pandora’s expenses are tracking at a $400 million run rate. Definitely doable for a company that has a Walter White-style cash hoard.

Hard to imagine Apple taking on a side project, but maybe this an exception. Then again, it could simply shell out a couple billion and buy Pandora itself.

 


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