Apple Inc. (AAPL): Here Comes the iRadio

iRadioTalk of an Apple Inc. (NASDAQ:AAPL) online music streaming service has persisted for the past year or so, in what most are now casually referring to as “iRadio.” That’s despite the fact that iRadio is already a registered trademark, which is the same challenge Apple Inc. (NASDAQ:AAPL) faces with the “iTV” everyone’s been talking about. Regardless of what Apple ends up calling its new streaming service, it’s about to be unveiled to the world, according to a pair of recent reports.

CNET says that the Mac maker is about to ink a licensing deal with two out of four of the major record labels. Warner Music and Universal Music Group may be preparing to sign on the dotted line within the next week. CNET’s tipsters say the service resembles Pandora Media Inc (NYSE:P), and doesn’t offer on-demand listening like Spotify. Apple Inc. (NASDAQ:AAPL) could appeal to labels by offering audio ad revenue sharing agreements, and the labels would also benefit if Apple can cross-sell songs in iTunes.

As one of the predominant music streamers with a first-mover advantage, Pandora Media Inc (NYSE:P) has the most to lose from an Apple Inc. (NASDAQ:AAPL) entry. This comes just as the company just reported total listener hours soaring to 14 billion last fiscal year, nearly four times the 3.8 billion listener hours served up two years ago. Active users more than doubled to 65.6 million over the same time.

The Verge believes Apple Inc. (NASDAQ:AAPL) will launch during the summer, quoting one of its own music industry sources as saying, “iRadio is coming. There’s no doubt about it anymore.” The industry is recognizing that access models are the future, with Pandora contributing roughly 25% of all access model revenue.

That may be a tough pill for Apple to swallow, as Steve Jobs famously bashed subscription access models as bad for the user. Jobs insisted that consumers like to own their music, since inevitable price hikes in subscription services force consumers to pay increasing fees or face losing all the content they’ve grown accustomed to.

While some don’t believe Apple should jump into music streaming because it’s generally not a profitable business, black ink has never been the motive for iTunes. Apple has historically operated iTunes slightly above break-even. The real goal for iTunes has always been to offer complementary content to boost device sales.

Breaking break-even
Asymco’s Horace Dediu estimates that Apple has recently departed from the break-even model and that iTunes and software (which were recently bundled together in Apple’s segment reporting restructuring) now generate $2 billion in operating income annually. Most of that positive operating income is generated from Apple’s first-party software offerings and not from music and apps (which are the bulk of iTunes sales).

The point of an iRadio service would not be to pad the bottom line; it would be an additional complementary service offering that could be integrated into devices to boost sales. Investors may only be a few months away from finding out for sure.

The article Here Comes Apple’s iRadio originally appeared on and is written by Evan Niu, CFA.

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.

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