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.
Digitas, which buys millions of dollars worth
of iAd inventory each year on behalf of clients such as American Express,
is already interested in the new service.
"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."
