Why Apple's iRadio could fly or flop

Apple's new iRadio has the potential to 'destroy' rivals like Pandora, especially if it can throw its weight around to reduce content acquisition costs.

Despite Apple’s record of success over the past decade, right now it’s hard to know what to make of iRadio and it’s future prospects.

Ten years ago, Apple revolutionised the music business with the introduction of the iTunes store. It wasn’t the first company to sell digital music online, but it was the first to make the process seamless and easy for consumers. What happened next was unprecedented change in the music business, fueled by how easy Apple had made it to buy single tracks for a dollar or thereabouts.

Whilst companies like Napster and Kazaa are generally credited with changing the music business through peer to peer distribution, the fact is Apple’s iTunes has had more of an impact in terms of changing people's purchase behaviours from buying albums to purchasing single tracks. The result - unit sales across the board are higher, yet revenue for the recorded music industry is significantly down over that ten year period. This interactive table from CNN demonstrates the problem.

Apple is now dominant in the digital music market - in the US 63 per cent of digital music sales are via iTunes. This puts it in a favourable position to launch its streaming radio product and most importantly, in a position to negotiate favourable deals with the music labels who own the recordings. More importantly, Apple and the labels have a common motivation: To ensure people keeping buying music. Do not underestimate the power of this. Especially when companies like Pandora, Spotify, Deezer and rdio don’t share this motivation.

iRadio is basically the same premise as Pandora - music curated based on your listening habits. Apple has the advantage of users music catalog access (if they are using iTunes) so has a good idea of the music that you like right now, as well as the music you liked enough in the past to either buy legitimately or via other means. If this doesn’t sound new then don’t be concerned - Last FM has been doing this for the better part of the past decade. When comparing the products of iRadio and Pandora, it comes down to the power of Pandora’s ‘Music Genome Project’ versus Apple’s data stash on its users and ability to recommend music to them they will like. The magic of good radio is finding that mix between giving you music you like right now, music you used to like and remember fondly, as well as music you don’t know about but enjoy. For iRadio and Pandora their market value should be linked to this and this only - neither owns the content they broadcast - therefore their core asset is their ability to give the listener the best mix of music.

iRadio will be available to users in two ways - ad free via iTunes Match (yearly cost of $34.99 in Australia) or ad supported and free. This mirrors Pandora - which offers users a free version with advertisements, or a paid version without. These radio services offer users more control that traditional broadcast radio, but far less than ‘all you can eat’ services such as Spotify and rdio, or even on demand video products such as Vevo.

The talk so far in the hours after the launch is whether iRadio will 'destroy' Pandora. It’s hard to say, but most likely the success of the product (and it’s ability to 'destroy' anything) hinges on a few key elements, neither of which Apple has nailed in the past few years around music or advertising.

Will iRadio be another Ping?

Remember Ping? Probably not. It was Apple’s 2010 attempt at a music based social network. At the time it was pronounced a killer of numerous things - based on its immediate scale as a result of being integrated into iTunes. Ping was a fail from day one, failing to deliver on its promise to connect music lovers and adding unnecessary features to an iTunes interface already becoming crowded. Two years on Apple shut it. Ping was Apple’s first real attempt post iTunes and the iTunes store to build something that could really provide value to music listeners - and it turned out to be a turkey that no one understood the point of. Sure, Apple had huge scale in this area, but Ping showed that you can be installed on hundreds of millions of devices and people still won’t care unless the product is good.

Apple still hasn’t nailed selling advertisements, can it start now?

At the start of 2010 Apple acquired mobile ad sales company Quattro and set about building iAd. iAd was built to solve the problems with mobile advertising, which was perceived to be too fragmented, ineffective and ugly. iAd has struggled to gain traction despite some huge early pronouncements from Steve Jobs - and is being beaten comprehensively in the mobile ad game by the likes of Google and inMobi. Selling advertisements to advertising agencies is a very particular practice, one that is worlds away from how Apple sells its products to consumers. If iRadio is to have an ad funded service then Apple will need to generate significant advertising revenue to fund content costs. Pandora is pulling in north of $400 million per annum in advertising revenue and even with this still lost $37.2 million over the past 12 months. Can Apple build a global ad sales force from scratch? Reports indicate iRadio will be sold by the iAd team - giving them a more appealing ad suite across mobile, desktop, tablet and devices such as Apple TV which will no doubt carry iRadio.

Can Apple leverage its importance to the labels to cut better content acquisition deals than its competitors?

The crippler for Pandora is content acquisition costs - which remain relatively fixed as a portion of revenue at around 65 per cent. The labels have no reason to not push Pandora to its financial limits in order to access their catalogues as Pandora has no real value to the labels other than a source of streaming royalties. It’s the same for rdio and Spotify, the labels realise that without them these products aren’t much more than code and given their power are pushing for onerous terms. Apple is different, it’s the leading retailer of digital music and possibly all music sales. On top of this, it shares the labels motivation to keep people buying music and not ‘renting’ it. This puts Apple in a better position to negotiate more favourable terms than Pandora. I have estimated that if Pandora could cut 15 per cent off its content acquisition costs it would be at a break even point based on current revenues, and profitable if revenues continue to increase. Apple has the power to negotiate this sort of deal with the labels, especially if it seeks to bundle deals with labels across iTunes as well as iRadio.

Based on its achievements, no one should underestimate Apple. However, based on their recent record, we shouldn’t overestimate them either.