Apple has intensified talks with major music labels to start an advertising supported streaming-radio competitor to Pandora by early next year, according to people with knowledge of the negotiations.
Discussions are centered in part around how to share ad revenue, and a deal could be reached by mid-November, with Apple starting service in the first three months of 2013, said the people, who sought anonymity because talks are in progress.
With sales of music downloads slowing, Apple and record companies want to create new ways for customers to discover and buy digital music. To challenge Pandora, Apple is seeking licensing pacts with labels that allow more flexibility about what listeners hear. Pandora, the internet radio leader, relies on a compulsory license that limits how often users can skip tracks and how many times an hour an artist can be played. Apple is also pushing for earlier access to new releases.
"Radio is a natural step for Apple," Rich Greenfield, an analyst with BTIG LLC in New York, said in an interview. "This helps Apple dominate in cars, where people listen to an average of two hours of radio a day."
Pandora, based in Oakland, Calif., had its biggest drop since Sept. 7 yesterday, declining 12% after Bloomberg News reported on Apple's progress in talks with the labels. The shares pared some of their losses today, rising 2.4% to $8.46 at 9:43 a.m. in New York. The stock had declined 18% this year before today.
Executives from Universal Music Group, Warner Music Group, and Sony Corp.'s music division visited Apple's headquarters in Cupertino, California, in recent weeks to learn more about its radio plans, the people said. Apple, the world's biggest music retailer with more than 400 million iTunes accounts, wants listeners to be able to buy tracks as music streams or revisit what they've heard in auto-generated playlists, they said.
Apple is looking to create an app tailored for its iPhone, iPad and iPod Touch, the people said. They said it won't be focused on delivering music through a Web browser.
Pandora, which creates music stations based on users' tastes, has whipsawed based on reports of Apple's plans. The shares fell 17 percent on Sept. 7, then gained 8.4 percent on Oct. 23 after Apple didn't introduce a radio service during an event it held to unveil the iPad mini, a smaller version of its tablet computer that will start shipping in November.
"We don't comment on our stock price or rumored competitive moves," Eric Brown, vice president of communications at Pandora, said in an e-mailed statement. "We remain focused on our listeners and delivering the best Internet radio experience for them."
Online digital music sales grew 8 percent in 2011 and 6 percent in 2010, compared with annual growth between 12 percent and 200 percent in the preceding five years, according to the London-based International Federation of the Phonographic Industry.
Apple's negotiations with record labels have centered around advertising, the people said. In addition to an upfront fee, record companies are seeking a percentage of ad sales and the ability to insert their own commercials for artists, they said. Apple sees the service as a way to grow its iAd mobile advertising platform, and is exploring ways to integrate iAd with iTunes to steer customers back to iTunes.
Tom Neumayr, a spokesman for Apple, declined to comment. Apple fell 0.1% at 10:01 a.m. after reporting quarterly profit and forecasting results yesterday that fell short of analysts' estimates. The shares had climbed 51% so far this year through yesterday.
The advertising initiative is part of broader flexibility that Apple CEO Tim Cook is giving the company's mobile advertising group to lure new business and integrate ads with other Apple services, according to people familiar with the matter.
As Apple competes with Google for mobile ads, Cook is giving more leeway than late co-founder Steve Jobs allowed on how much Apple charges and how much data is shared with marketers, said the people. That already won Apple multimillion-dollar contracts from Procter & Gamble and others for ads that appear inside thousands of applications available to iPhone and iPad users.
"If Apple offers a radio product, it will be far superior to anything else on the market," said Mr. Greenfield, who recommends selling Pandora shares and doesn't cover Apple. "They're seeking direct licenses to avoid all the restrictions that come with a compulsory license."