Apple iRadio - Royalty Negotiations, and What We Know

It was widely reported yesterday that Apple had been in negotiations with the record labels to add a streaming music service - rumored to be called "iRadio".

The hope, apparently, was that iRadio would launch with the iPhone 5. That obviously didn't happen.



But that doesn't mean that the dream is over - Tim Cook Himself is reported to have recently met with Jimmy Iovine - chairman of Interscope/Geffen/A&M and famed "mentor" to American Idol hopefuls - regarding a streaming audio service.

When heavyweights like Iovine and Cook are in the same room, people will notice. And speculate.

It was also reported that Apple's initial offer - 6 cents per 100 songs streamed - was considered to be very low. What's considered "normal", and why does Apple think they can re-set this market?

For starters, it appears that "normal" is 21 cents per 100 songs - more than 3X what Apple offered. The TUAW article notes that the 21 cents figure was set by the Copyright Royalty Board.

That said, the amounts actually paid by different internet music providers vary wildly. And it appears that no one actually pays exactly that recommended 21 cents:

Spotify - 35 cents

IHeart Radio - 22 cents

Pandora - 12 cents

Apple's offer - 6 cents

We know that Spotify has been trying to negotiate the price they're paying down.

But why is Spotify's price so (relatively) high in the first place? And why does Apple think (or at least "hope") that they can get in for half of the current "low-cost" streaming champ, Pandora?

Spotify - High Listener Choice, No Tie to Music Sales

The answer, of course, is that Spotify offers the most choice for the listener. You aren't listening to a radio station - you are literally selecting tracks and making playlists, as if you owned the music. 

Spotify argues that their model increases interest in music, leading to music purchases. People are getting exposed to music they wouldn't otherwise hear, and as such they'll be more likely to buy an album.

That exposure isn't really controlled, however - we get exposed to new music on Spotify when a friend posts a playlist, or occasionally when the front page lists something new and notable. 

However, it's easy to see how Spotify's model can, in some circumstances, actually depress music sales. Every time there's a new hit song, we can listen to it more or less indefinitely, or until we get sick of it. 

Our Spotify play history is littered with Call Me Maybes and Super Basses and so forth - and those artists received next to nothing from us, as free Spotify users. 

We probably listened to "Super Bass" 100 times via Spotify over the course of 2011. Spotify paid the record label 35 cents. Nicki Minaj probably got - at most, a nickel from us. 

In a pre-Spotify world, we definitely would have paid a dollar to iTunes for that song - it's still great.  (In a pre-iTunes world, we may have even paid $10 for "Pink Friday". But let's face it, the horse isn't going back into THAT barn.)

So why is Pandora paying about 1/3 what Spotify pays?

Pandora - Low Listener Choice, Limited Ties to Music Sales

Pandora lets users create their own "customized radio station". You tell it the kind of music you enjoy, and Pandora creates a streaming playlist of similar music. 

You can occasionally skip songs you don't like - but really, if you're hoping to hear "Super Bass", you may be waiting a while - even on your "Nicki Minaj" channel.

This explains why Pandora is so much cheaper - it's not really a substitute for purchasing music, AND the labels can have some element of control over what music you're getting exposed to.... i.e., "if you like Wilco, check out Autumn Defense!" 

There is a "Buy" button on Pandora - if you like a particular song, you can click to download it on iTunes or Amazon, or even to buy the whole CD on Amazon. Obviously, Pandora presents that as a way to keep their royalty costs down - but it's far from a primary feature of the service. 

Apple iRadio - Low Listener Choice, Direct Ties to Music Sales

This is where Apple comes in. Apple is, far and away, the biggest seller of music on the internet. The iTunes Music Store generates massive profits for Apple, and massive profits* for the recording industry.

(*I mean, nothing like the profits they enjoyed when we were all paying $16.99 for CDs back in the 1990s - but still, pretty massive.)

Based on the unused button graphics that were uncovered by 9to5Mac, it is apparent that Apple wants a one-touch "Click to Buy" feature to be very prominent in iRadio. 

And for a listener, that makes sense. Downloading a song seems like less of a hassle when I'm already in the iTunes environment. 

Apple has also demonstrated that it can provide Pandora-level "radio station customization" with their Genius button. 

In fact, Apple can take it one step further, using your iTunes library to put some data around determining what kind of music you like. 

You may be able to "iRadio enable" your Genius playlist function, and when Genius creates a playlist around, say, "Even Flow" by Pearl Jam, it will not only include the cuts from "Nevermind" and "Gish" that you already own - but also, a handful of tracks from Meat Puppets and Screaming Trees that you *don't* own - but that the iTunes algorithm believes you'd be likely to love, and to buy.

It works in the other direction, too - when you're listening to Apple iRadio, it could occasionally play songs from your library, thereby cutting down on LTE data usage.

I can see where Apple is coming from with their 6 cents offer. From Apple's standpoint, they're giving the music industry an opportunity to directly market to receptive consumers. 

Of course, from the record label's standpoint, it's just another brick in the wall.