Apple iRadio should have Pandora scared

The biggest threat of the new service: It's free.

By InvestorPlace Jun 3, 2013 6:18PM

Image: Teens with MP3 player (© RubberBall/SuperStock)


By Tom Taulli

It’s been a slow

process, but it looks like Apple (AAPL) is making headway with its new streaming radio service, nicknamed iRadio.

As should be no surprise, the hard part has been the negotiations with the mega recording labels. But the buzz is that Apple just snagged a deal with Warner Music Group and is close to getting one with Sony (SNE).

So if everything goes according to plan, Apple may actually announce iRadio next week at its annual developer’s conference.

While the details are fuzzy, iRadio should be a contender. The service is expected to allow a user to personalize music based on genre or artist. Of course, this isn't new. To differentiate itself, Apple will offer some interesting features. A cool one is the ability to rewind a song. Plus, iRadio will be free since the revenues will come from advertising.

No doubt, the online music landscape is already full of rivals. Some include mega operators like Google (GOOG) and Amazon (AMZN). Yet they may not suffer too much from iRadio, since these companies have diverse businesses and can leverage their distribution strengths.

In the case of Amazon, for one, the giant company has a massive footprint of e-commerce customers as well as the Kindle platform. Google, on the other hand, has an online ecosystem along with its mobile operating system, Android.

With that in mind, it seems clear that the pure-play online music companies are likely to be the most vulnerable. Players like RDIO, Slacker and Rhapsody will have a tough time rising above the noise and even Spotify may struggle to get new customers -- especially those willing to pay a monthly subscription fee.

Then there is Pandora (P), which is a direct competitor to iRadio. Sure, the company posted a solid first-quarter report, with revenues up 55% to $125.5 million and quarterly listening hours increasing by 35% to 4.18 billion. And it's promising that about 80% of the growth was from mobile devices.

But Pandora has not been able to achieve profitability . . . despite the fact that it's has been around for 13 years! Onerous licensing agreements with the recording industry -- the same ones Apple struggled with -- have been holding it back. In Q1, the fees accounted for a staggering 66% of sales.

To deal with this, Pandora has limited the listening time to 40 hours per month, which has indeed helped to move users over to paid subscriptions. But if Apple provides a free version, it seems plausible that users might just move over to iRadio -- especially since, when it comes to radio, customers tend to be comfortable with occasional ads.

Besides, Apple has the advantage of its massive iOS platform and iTunes franchise, which has over 500 million customers. The company will also likely roll out commercials to generate interest in the new service.

In other words, iRadio could be a nightmare for Pandora’s shareholders. In fact, shares shed double-digits on Monday -- and the new Apple service hasn't even been released yet!

Tom Taulli runs the InvestorPlace blog IPO Playbook. As of this writing, he did not hold a position in any of the aforementioned securities.

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