Apple Inc. (AAPL) & iRadio: How Will The Stock Price Be Affected?

Apple Inc. (NASDAQ:AAPL) first came out with its well known iTunes media player 12 years ago. Since then it has gone on a massive spree of innovation, growth and profitability, with most of its revenue now coming from gadgets like the iPhone and iPad. But it’s come to investors’ attention that Apple is going back to creating another service focused on music just like its original iTunes, dubbed iRadio. I should mention that “iRadio” is not any official name given by Apple Inc. (NASDAQ:AAPL) but rather the name given by outsiders, and is not owned by Apple.

Apple Inc. (NASDAQ:AAPL)

What is iRadio all about?

While there are plenty of blogs and news portals reciting the same rumors, at this stage little is actually known about Apple Inc. (NASDAQ:AAPL)’s iRadio venture. No Apple spokesperson has commented (merely stating that it’s not their policy to comment on “rumors and speculation”), and thus we only have second-hand information at this stage. It is my understanding that The Verge (a technology and news media network) is the primary cause of iRadio hype and speculation, having stated the following (I am unable to verify any of these claims):

“Now multiple music industry insiders have told The Verge that significant progress has been made in the talks with two of the top labels: Universal and Warner. One of the sources said “iRadio is coming. There’s no doubt about it anymore.” Apple is pushing hard for a summertime launch.”

Assuming iRadio really is going to eventually come to existence, all we really know about it for now is that it will serve as some kind of competitor to Pandora and Spotify. These are services that allow users to stream music online, and then optionally purchase songs they like at online retailers. Pandora is the more popular of the two and is entirely free (although there is the option to pay $3.99/month for an ad-free version), and unlike Spotify, it has an advanced suggested-song algorithm that recommends new music to the user based on their current favorites and tastes.

While Spotify is not publicly traded, Pandora is, and we can dig into its numbers. Recently Pandora announced that it now has over 200 million members, and in its fiscal year 2012 results it was reported that revenue for 2012 was $427.1 million, up 56% from last year’s revenue. Even more impressively, total listener hours in 2012 were up 70% to 14.01 billion hours. Yet despite these numbers, Pandora has ran at a loss, and some argue that it will never be profitable due to the heavy costs involved in acquiring content and paying labels and artists.

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 is written by John Smith.

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