Apple's proposed Web radio service is no certainty

Apple is working hard to convince the major record companies to buy into its plan for a Web radio service, but some at the labels don't like what they're hearing.

Bloomberg reported this afternoon that Apple's negotiations with the three top labels have "intensified" over an ad-support Web radio service that Apple hopes to launch early next year. But music industry executives who spoke with CNET said that some decision makers at the big record companies want Apple to sweeten the offer.

The negotiations are ongoing so the terms could change, but the sources said Apple has offered to pay a lower royalty rate than Pandora pays even though it wants to provide iTunes users with the ability to do more with the music than Pandora's customers enjoy. Pandora, the leading Internet radio service, pays a statutory rate set by Congress. Under the terms of this rate, Pandora must limit the way users interact with songs, such as capping the number of times they can listen to the same song or an individual artist.

In exchange for this greater flexibility with songs, Apple is offering a percentage of the ad sales generated by the service. CNET's sources say that some of the sector's leaders don't believe the cut Apple put on the table is big enough. Others in the music industry, however, argue it's good for the overall business if Apple takes on Pandora.

Pandora has become a behemoth in Internet radio and the labels favor seeing multiple competitors in each of its distribution categories. One source said iTunes' can easily market a Web radio service to its humongous audience and the company can also figure out the best way to use iRadio, the unofficial name given to the service by those in the music industry, to boost download sales, which are flat.

Apple owns 64 percent of the legal music market and in addition to the leverage this kind of market share provides Eddy Cue, Apple's senior vice president of Internet Software and Services, the top labels must also consider what happens if Apple is prevented from getting a deal.

Some music industry insiders speculate that Apple could conceivably throw in with Pandora and help get the Internet Fairness Radio Act passed. That's the name of legislation introduced into Congress this year that seeks to reduce the royalty rates Web radio services must pay for music. The sources said that to date, Apple has not made any threats of joining forces with Pandora.

The big record companies are planning to fight tooth and nail against the bill becoming law.

CNET has learned that the top record companies plan to quietly gather next week to discuss their strategy for fighting the legislation. In addition to the representatives from the top three labels, invitations were sent this week to some of the music industry's top music managers.