If Pandora has not been able to become profitable after many years, then how will Apple Inc. (NASDAQ:AAPL) create a similar service that is profitable? And what will be the features of its new iRadio service that would make it superior to Pandora? This remains to be seen. I am sure that given Apple’s reach, existing customers (especially through iTunes) and resources, Apple Inc. (NASDAQ:AAPL) can build a platform equal in value (or greater) than Pandora. Apple’s resources give it a significant advantage over any smaller company it ever comes into direct competition with, and I believe Apple may easily be able to learn from the mistakes of Pandora and Spotify to create a better service.
Signing on music labels
In order to build iRadio and have the right to host artists’ music, Apple has to sign on major record labels. The three main companies that Apple Inc. (NASDAQ:AAPL) has apparently been negotiating with are Universal Music Group (not publicly traded), Time Warner Inc (NYSE:TWX) and Sony Corporation (ADR) (NYSE:SNE). Over a month ago this story emerged about how Apple had made an insultingly low offer of just $0.06 per 100 songs streamed, a small fraction of Pandora’s rate of around $0.12 per 100 songs streamed (Spotify pays even higher at $0.35 per 100 songs streamed). Later, it was reported that Apple’s iRadio deal could be sweeter than Pandora, again according only to “people familiar with the negotiations” (we don’t know exactly who). Recently The Verge then posted that deals are imminent, perhaps as soon as next week (it was informed, apparently, by “multiple sources with knowledge”).
The most important question: how will iRadio impact Apple stock?
Let’s assume that iRadio signs on major record labels and launches this summer, as predicted by The Verge. I do not believe that revenue generated by iRadio over the coming years will have a significant impact on the health of Apple as a whole or their stock price – it simply isn’t big enough. Pandora was able to generate $427.1 million in revenue in 2012 (though net income was $16 million in the red). In 2012 Apple generated $54.5 billion in revenue, more than 100 times Pandora’s revenue, with extremely strong profit margins (unlike Pandora). Even in the absolute best case scenario, where iRadio turns out to be a far better service than Pandora and brings in far more users and revenue, it cannot possibly ever be a revenue stream as strong as any of Apple’s major products (primarily the iPhone, iPad and Mac). In my view, Apple shareholders therefore need not worry too much about what becomes of iRadio as far as their investment is concerned.
The article What Will iRadio Mean for Apple’s Stock Price? originally appeared on Fool.com is written by John Smith.
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