) got into the music business in April 2003, the company didn't
actually expect to make money at it. The iTunes store launched with
only "break-even" ambition as far as Cupertino was concerned,
merely acting as a hook for the real profit center: The iPod.
So much for self-fulfilling prophecies. Five years in, iTunes had
) as the country's leading music vendor and assumed the top spot in
the global market by 2010. Last year's sales hit
, with Apple generating up to 15% operating margin on gross revenue
while commanding 64% of the world's online music sales.
Now, as Apple takes its next bite out of the music industry with
the upcoming iTunes Radio --
launching as soon as September
-- "aim low" is, once again, the M.O.
For starters, while hugely popular, the music-streaming business
isn't particularly lucrative. In fact, it's downright depressing.
) 70 million faithful users and Spotify's 24 million, both services
continue to post net losses
in the tens of millions -- crushed in large part under the weight
of hefty licensing fees.
But Apple is not only undeterred by the costs of acquiring music
rights, it's ready and willing to pay more. A lot more.
More than twice
Pandora's rates, more.
The obvious business model relies on ads. iTunes Radio subscribers
will hear audio ads every 15 minutes and see video ads every hour.
(iTunes Match users get the service ad-free.) Apple's partnerships
with top-shelf brands like
Procter & Gamble
(PG) are said to "pay anywhere from high single-digit millions of
dollars to tens of millions of dollars for a year-long advertising
campaign exclusive within their respective industries."
Of Apple's net ad revenue, record labels will take 15%, plus
$0.0013 per song play in the first year. These figures are reported
to increase to $0.0014 per song play plus 19% of net ad revenue in
So why does it seem an iTunes Radio profit isn't making Apple's
priority list? Other than iOS 7, the service isn't tethered to a
major product launch that counts on a symbiotic relationship the
way the iPod was teamed with iTunes and -- to a lesser extent --
the App Store helped sell the iPhone.
Apple's move into Internet radio isn't really about Internet radio
at all. Instead, it's about keeping its users from other Internet
radio products. If Apple can provide this in-demand service to its
iOS faithful, they won't be tempted to stray and find themselves in
the open and exciting arms of threateningly hip startups. Being all
things digital means the cult of Mac won't have to worry about
defectors bolting for the door.
"Music streaming is one of many elements Apple is attempting to tie
together so that it can have the most comprehensive entertainment
offering in the industry," says Bill Kreher, an Apple analyst at
Edward Jones. "The addition of iTunes Radio enhances the overall
What will likely make Apple's offering decidedly compelling for
Internet radio consumers is that most of them already have an
iTunes account with a library full of digital music purchases and
uploaded CDs from which the streaming service will allow them to
draw. iTunes Radio is pre-installed on any iPhone or iPad running
iOS 7, included in iTunes for OS X and
(MSFT), and available on the Apple TV. Simply put, it's a
brilliantly built-in customer base.
It's also not a stretch to see how iTunes Radio could reel in
existing Pandora, Spotify, and even
(GOOG) subscribers who still use iTunes -- out of convenience
alone. An opportunity to de-clutter our devices of one less app and
remember one less password really starts to up the ante.
So much for self-fulfilling prophecies.
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