How Apple's iTunes Radio will rock the world

With the arrival of iTunes Radio, which comes out this week with the release of iOS 7, Apple is poised to tackle the streaming music market like no other entrant before it.

It's shaping up to be quite a big deal. Not only will iTunes Radio pose the biggest threat to Internet radio king Pandora to date, as I argued here, but Apple now will get an opportunity to recast a decade-old debate about the respective roles of man versus algorithm when it rolls out this new piece of streaming music software. Apple has built a service in its own image that, to a large degree, leans on taste makers as well as mathematics.

In a still-young digital music industry, everyone from Spotify to Google is trying to figure out the best way to help music fans discover new music. Yet so far, most people are discovering music the old fashioned way -- via FM radio.

So here comes Apple, which very much wants to be your DJ -- albeit with a heavy dose of your iTunes behavioral data mixed in. And the big music labels, working closely with their largest digital partner, are rooting for Apple's success. iTunes Radio will roll out with 300 or so genres, from hip-hop to country and doo-wop. It also let's you enter an artist's name -- a la Pandora -- to build a station, and it does so for free with ads.

Because this is Apple, the potential stage is global, even though iTunes Radio is rolling out initially in the US only. The agreements Apple has with the music labels and publishers generally give it rights to the countries where iTunes operates, which is now in 119 territories -- many of those are countries that have no Internet radio service at all. Pandora, meantime, operates only in the US, Australia, and New Zealand.

For the music labels, the hope is not just that Apple lures people from Pandora -- the company has a rocky relationship with the labels -- but that iTunes Radio pulls millions of people from the FM dial over to streaming radio, a more lucrative place for the labels.

"We're hoping Apple shakes up the entire radio market," said one top digital music executive speaking on the condition of anonymity.

That's also Apple's goal. In the runup to this week's rollout, for instance, Apple has asked all the major music labels for their "heat seekers" lists, according to people familiar with process. Those are the lists the labels keep of artists and songs they're betting are on the verge of breaking -- even though the data might not yet point to success.

At the same time, Apple has been staffing up and is looking to hire a range radio music programmers. These are people with deep knowledge in genres such Latin, metal and alternative music who will be responsible for selecting and promoting songs out of the thousands of new releases each month. Apple has also been trying to poach people from the labels themselves.

Apple: New approach to digital music?
This human approach is very Apple. After all, the iTunes Store, which despite attempts by Amazon and Google remains by far the biggest digital music marketplace, relies on people to select which artists get featured, and that can make a new album or track. And so the people at iTunes Radio, which is an extension of the iTunes Store, will work closely with the labels to figure out whom to feature when. At least that is the expectation at the labels, which already work this way with the iTunes Store. Apple didn't respond to requests for comment.

Such collaboration is something that just doesn't happen with Pandora, which doesn't work with the labels beyond getting new music and data. (The two sides are at odds over money because Pandora pays rates determined by federal statute instead of cutting direct, more lucrative deals with the labels.)

What it boils down to is coming up with the best way to discover new music in the digital era. In some ways, this is what all these services are trying to crack, whether it's Rdio, Slacker, or Google Music All Access. The human touch, for instance, is the backbone of the upcoming Beats streaming service run by music industry veteran Jimmy Iovine.

And just look at what Spotify, the fastest-growing on-demand music service, recently did. It has always relied on algorithms, apps, and social -- creating and sharing playlists, following other people -- to help its users discover new music.

Then last month Spotify added another way to discover music with a feature called "browse," through which you can find playlists created by a team of editors or writers. It seemed like an unusual move for Spotify. But then again, CEO and founder Daniel Ek is always looking for new ways to help people sort through the sea of digital songs.

"Our big problem is, how do we make sense of what you want to listen to?" Ek told me recently.

All the concern over discovery is a valid one for the music industry. A recent study, underwritten by radio giant Clear Channel, found that 80 percent of people turn to radio to find new music. Nielsen last year found that radio came out on top as well.

And another study, from 2011, found that the average iTunes user never listens to 81 percent of their music library, suggesting that people like what they know, but also that there's an opportunity to push new tracks to people on digital radio the way that happens with FM radio. Actually, in a better way, considering how hard it is to get music on radio.

So for all the attention given to streaming music, which now makes up the fastest-growing segment of the recorded-music industry, much of the world is still listening to AM/FM radio. Which is why network radio in the US captured the bulk of the roughly $14.8 billion advertisers spent in 2012. At the same time, though, more and more radio fans are listening online, either by streaming AM/FM stations or by tuning into pure digital radio plays like Pandora.

And if Apple can steal some of those people and inject new releases into the stations, it has a chance to also sell them more music. At least that's the bet. Sure, you can jump from Pandora to Google Play or iTunes to buy a song, but the process is clunky and, according to music execs, few people do it. With iTunes Radio, by contrast, there's a quick Buy button atop the track you're listening to.

All this is not to underestimate the critical role of data with iTunes Radio. Apple iTunes, which has already has 575 million customers, says your stations will improve over time, becoming more personalized. Plus, the data Apple has could prove more powerful than any that rivals have. Think about it: If you bought three singles off an album, the algorithm should know that you haven't bought a fourth and could begin plugging that into your stations.

"Advances in music have always been driven by a union of man and machine," said Jim Lucchese, the CEO of The Echo Nest, whose music intelligence platform powers parts of Spotify, Vevo, and Rdio, among others. "And that's not going to stop any time soon."

Pandora girds for Apple onslaught

Naturally, Pandora is on the defensive. After all, aspects of iTunes Radio seem inspired by Pandora, and its execs have argued -- possibly correctly -- that iTunes Radio could end up helping Pandora. And Pandora's metrics are impressive, with more than 72 million active listeners, although Pandora late Monday warned that its growth is slowing. Moreover, Pandora listeners make up more than 70 percent of Internet radio listening -- and more than 7 percent of all radio listening.

While Pandora has 1 million tracks -- versus iTunes Radio's 27 million -- its execs boast that more than 95 percent of the songs on Pandora are played once a month, proving that Pandora is cataloging music that people want to hear.

"We're not investing in music that people aren't interested in," said Michael Addicott, Pandora's manager of curation. "All our music is curated, goes through a vetting process."

What he's referring to is Pandora's Music Genome Project, where experts log tracks based on musical qualities so that the algorithm knows how to mix them into a given station. Once the stations are created, the algorithms are in control, although the stations evolve as listeners give feedback by clicking a thumbs-up or thumbs-down button.

"Just because a label wants us to push a song doesn't mean we do," said Addicott. "We defer to the listeners. They ultimately tell us what songs to play more often than other songs."

Pandora certainly deserves credit for building a service people love and doing it early on.

"When we started this nine years ago, it was clear to us the inevitable shift from FM broadcast [Internet] radio," said Tom Conrad, the CTO of Pandora in charge of the product. "It took Apple eight years to figure that out."

Perhaps, but we all know that might not matter. Pandora's nightmare scenario is that Apple has exploited the latecomer's advantage, watching what earlier Internet music services have done and then fashioning an easier, more intuitive alternative. Now it's up to the consumers, who will vote with their ears.