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For labels, Apple's iRadio deal could be sweeter than Pandora

Apple is close to a deal with two major music labels to bring to life its streaming-music service, which could pay labels better than Pandora does.

Paul Sloan Former Editor
Paul Sloan is editor in chief of CNET News. Before joining CNET, he had been a San Francisco-based correspondent for Fortune magazine, an editor at large for Business 2.0 magazine, and a senior producer for CNN. When his fingers aren't on a keyboard, they're usually on a guitar. Email him here.
Paul Sloan
4 min read

Apple is close to striking a streaming deal with two of the major music labels that could end up far sweeter for the music industry than what the labels currently get from Pandora, according to two people familiar with the negotiations.

Much has been made in recent weeks of Apple trying to squeeze the labels on terms, and the deals do have Apple paying the labels a per-stream rate that's half of what Pandora pays. But CNET has learned that Apple's planned music service would offer new revenue streams as well.

That includes a quick way for consumers to buy a song they hear, potentially boosting download sales from iTunes, as well as a revenue share of new audio ads Apple is planning to add to the free service, according to sources.

The product would be tied to iTunes, and available on mobile devices.

Apple spokesman Tom Neumayr declined to comment.

Apple could sign deals with both Warner Music and Universal Music Group within the next week, according to the sources. But both people caution that the deals have not yet been made and could still fall apart. In addition, Apple still needs to get Sony Music Group on board, as well as the music publishers.

Even so, Apple has told the labels it's determined to get all its deals signed in time for a summer rollout. In addition to the U.S., Apple is hoping to quickly unveil the service in up to a dozen territories, according to sources, including the U.K, France, Germany, Australia, and Japan. Apple's annual developers conference, where it first introduced iCloud and iTunes Match in 2011, typically happens in early June.

Though the press has dubbed the service iRadio, in negotiations with the labels Apple is referring to it as its "new streaming service," says a source.

The service, according to sources, most closely resembles Pandora because it doesn't offer on-demand listening. Apple is building some unique features, such as the ability to jump back to the beginning of a song, according to one person briefed on the company's plans.

Apple faces growing competition in the music market. There's been a proliferation of on-demand streaming music services with both free and paid plans, from Pandora to Spotify to RDIO. Apple rival Google is also set to launch its own streaming-music service as part of YouTube. Sources told CNET recently that Google is aiming to launch its product, which would work on desktop and mobile devices, this summer and that it is also working on another service for Google Play.

To some degree, the music labels are taking a gamble on Apple. Label executives are confident that any Apple iRadio service will gain traction, given Apple's dominance with iTunes and the likelihood that Apple will make an easy-to-use service on the iPhone. And the labels are guaranteed to make a slice of every stream that's played, albeit a fraction of what the labels get from Pandora.

Late Apple CEO Steve Jobs unveils iCloud's music-syncing feature in San Francisco in 2011.
Late Apple CEO Steve Jobs unveils iCloud's music-syncing feature in San Francisco in 2011. CNET

What's unknown, however, is whether people will click through the app to buy songs that they can stream, and how successful Apple will be at pulling off the ad part of the business. Though Apple serves ads on mobile apps via iAds, the sources said that what the company is proposing to the labels is something different -- a full-on, multinational sales force that would sell audio ads akin to what Pandora serves up for listeners to its free service.

"The only thing concrete in the contract is the per-play rate," said someone familiar with the terms. "If you end up having no ad revenue, that's still zero. And we won't know what the buying habits will be. Will people streaming still take the time to buy from iTunes?"

These sources said Apple and the labels are still hammering out what the revenue share of the ads would be but that the labels are pressing for generous terms -- possibly between 35 percent and 45 percent -- if they are to agree to a small portion of the per-stream revenue.

Reports that Apple has been working on a streaming or subscription music service have lingered for years. Apple owns nearly two thirds of the legal music market, something that adds extra scrutiny to the possibility of a new service, or a change to its existing business model.

Apple already has Internet music streaming inside of iTunes for desktops, as well as on its Apple TV devices, but not on iOS. The feature taps into streaming Internet stations maintained by third parties, and doesn't connect with Apple's iTunes Store in case a user wants to purchase a song. Users also can't record or save anything they hear.

Adding intrigue to the possibility is a set of buttons and code referencing "radio" that were spotted in an update of Apple's iOS software in February. These features were not active or available on the software itself, but nestled in some code strings.

CNET Senior WriterJosh Lowensohn contributed to this report.