Will Apple's iRadio Erase Pandora?

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Reportedly, Apple Inc. (AAPL) is expected to unveil its music-streaming service iRadio in the upcoming Worldwide Developers Conference (“WWDC”) scheduled to be held from Jun 10-14. According to Bloomberg, the music service is expected to release by the end of this year, simultaneously with Apple’s iOS 7 mobile operating system.

iRadio is expected to be a free service supported by brand advertisements much on the lines of Pandora (P). Similar to Pandora, iRadio will stream songs as per users’ choice, but will offer additional features such as the ability to rewind a song while still listening to it.

Apple is expected to closely integrate iRadio with iTunes, as it will allow users to easily buy a song of their liking from the iTunes store. Additionally, iRadio users can listen to an unlimited number of songs irrespective of their purchase.  

To boost its iRadio offerings, Apple signed a licensing deal with Universal Music Group in May this year. Apple has also signed up Warner Music Group and its publishing division Warner Chappell and is reportedly in deep negotiations with another major publisher, Sony Music.  

Reportedly, Apple has agreed to pay a similar/higher rate than Pandora to secure these licensing deals. Apple expects the free radio service will boost its sagging iAd business, which continues to lose market share amid significant competition from the likes of Google (GOOG), Facebook (FB), Pandora and Millennial Media in the mobile advertising market.

Apple is also negotiating with advertising companies such as Omnicom Group (OMC) for securing sponsors for iRadio. Moreover, Apple has already lowered fees and cut prices to attract media agencies and is now selling alcohol based advertisement within its apps. These moves reflect a major shift in Apple’s strategy to woo advertisers, which will boost its top-line going forward.

Conclusion

We believe that the iRadio will benefit from Apple’s huge customer base, which is the major attraction for advertisers. Since Apple will directly operate iRadio’s service (instead of third party developers that traditionally used iAd to make money) advertisers will feel much more secure about the proper distribution of their ad campaigns.

Additionally, the close integration with iRadio will boost iTunes’ physical sales, which will boost Apple’s top-line growth going forward. However, Apple is expected to see significant competition from Spotify, IHeartRadio, Google’s recently launched service and particularly, from Pandora in the near term.

In this regard, we note that Pandora ranks #3 among the top grossing apps in Apple’s App store and enjoy a first mover’s advantage in the music streaming industry. Therefore, Pandora’s already popular service (approximately 70.1 million users) driven by its effective discovery engine and well established infrastructure will provide significant competition to Apple in the near term.

Currently, Apple has a Zacks Rank #4 (Sell).

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