Now hear this: Apple will sell audio ads on its forthcoming streaming music service, already being dubbed "iRadio" by many. The service is expected to offer highly targeted ads, which could make it pricey -- but appealing -- to marketers and a major threat to already-struggling Pandora.
The audio ads will be sold via iAd, Apple's mobile ad network, according to a former Apple executive with knowledge of the situation. In addition to audio ads, the streaming music service will also contain the mobile ads iAd currently sells.
Apple is expected to announce the streaming music service at its Worldwide Developers Conference (WWDC) in San Francisco next week.
An Apple spokesman declined to comment.
iRadio -- or whatever it's ultimately named -- could be a boon to iAd as audio ads typically more costly than banner ads. iAd is expected to retain a higher percentage of that ad revenue compared with other iAd inventory. Currently, 70% of iAd revenue is given to publishers who monetize their apps using the service, according to Apple's iOS developer program. For iRadio, Apple would only share 10% of ad revenue with music rights holders, The Wall Street Journal reported. Pandora pays out around 4%.
Selling interstitial audio ads -- ones that play between songs -- will allow Apple to offer the service free to users as is typical with most streaming music services. One music industry executive familiar with the negotiations between Apple and the major record labels said the terms of iRadio are more favorable for record labels than other streaming services because iRadio is expected to drive more song downloads.
iRadio users will be able to purchase the song they are listening to through iTunes. Syncing with iTunes Match ($24.99 per year) will allow users to own those songs forever, keep them in Apple's cloud-based storage service and access them on any iOS device. However, the service will not allow users to search for and play a specific song on-demand, like with Spotify.
This model means iRadio's most immediate competition will be Pandora, the streaming music service that provides personalized radio stations. Pandora is projected to generate $372.1 million in mobile ad revenue this year, making it No. 3 in the category behind Google and Facebook, according to eMarketer. That revenue is forecasted to increase to $550.4 million in 2014.
A Pandora spokeswoman said its estimated earnings per thousand impressions for audio ads, or eCPM, is "significantly higher than display."
However, Pandora's ad targeting capabilities are limited, which could allow Apple to charge more for ads in its service and cut into Pandora's growth.
"The more you can target [an ad], the more expensive it is," said Dirk Rients, director of mobile at marketing agency DDB.
Pandora can only target users based upon their sex, area code and listening habits. If a Pandora user changes his or her permanent residence and fails to update their zip code in his or her Pandora account, the ability to target ads based upon location is nullified. Using iRadio on an iPhone will give iAd the ability to more precisely target ads to users based on location.
Apple's music service will also involve targeting consumers based on all of their entertainment tastes, according to the former Apple executive. Because the service will be integrated with iTunes, Apple will be able to tailor ads based on what movies, TV shows and mobile apps users have downloaded.
"Once they start to build up some market share it will be very compelling for us," Digitas VP John Tuchtenhagen said. "Starting early next year, it's definitely something we want to test. … We've already started to talk to our clients about it."
Despite its ability to target audio ads better than Pandora, Mr. Rients said Apple will have to be wary of making them too expensive and subsequently reducing the cost as it did after launching iAd.
In the run up to the service launch, Apple has been inking deals with the major record labels. Warner Music Group has already signed on, according to a person with knowledge of the situation. Universal Music Group has also reportedly signed a deal for the service, but declined to comment. A spokesman for Sony Music Entertainment, the remaining major record label company, declined to comment on the service. Sony/ATV Music Publishing -- the entity Sony jointly owns with the Michael Jackson estate -- is optimistic it will sign a deal with Apple soon, according to an ATV spokesman.
ATV is reportedly trying to negotiate a rate that would give it no less than 10% of the advertising revenue earned from the service. The company owns the copyrights for artists such as The Beatles and Bob Dylan, but doesn't own the physical recordings, so its licensing deals tend to differ.
News about the label deals incited speculation that Apple was gearing up to announce iRadio at WWDC next week.
Even if iRadio is a huge success, digital advertising will remain a miniscule portion of Apple's business. According to eMarketer, iAd is projected to earn $213 million this year and $376 million in 2014, a 77% increase. Comparatively, Apple reported revenue of $43.6 billion in its most recently completed quarter.
"What's more exciting on the device side is that we think a cheaper phone is coming," Piper Jaffray research analyst Douglas Clinton said. "Devices are still the thing that drives Apple at this point."