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How Apple's iRadio Could Pose a Problem for Pandora

NEW YORK ( TheStreet) -- Apple's (AAPL - Get Report) imminent move into Internet radio could, if it further moderates Pandora's (P - Get Report) content spend, end up a net positive for the audio streaming pioneer.

At the same time, it validates the Pandora approach to delivering music.

As I have been writing about for months -- and most recently this past week -- pure play radio services such as Pandora and, if it comes to market as rumored, iRadio are better for the music industry than platforms such as Rdio and Spotify which feature on-demand listening.

Simply put, the Pandora and rumored Apple models promote music ownership over access, at least to a greater extent than a platform like Rdio.

Apple apparently plans to position its service to drive physical record sales in its iTunes store. That's precisely what Pandora has been doing for years. Emphasize this: Pandora helps Apple sell more music. (Headline courtesy the Mark Ramsay Media blog.) Users of discovery platforms tend to buy more music than the average listener. That's key.

One more thing you cannot forget: As of this writing, Pandora sits in third place among the top grossing apps in Apple's App Store. You do not find other music services on that list until Rdio at No. 54 and Slacker at No. 56. So there's more of a symbiotic relationship between the two than popular memes suggest. In other words, expect a relationship where Pandora and Apple continue to benefit one another under an atmosphere of slightly stepped-up competition.

Pandora's competitive advantages -- huge user base, best-in-breed discovery engine (the Music Genome Project) and infrastructure in place to poach ad sales from traditional radio's $14 billion-to-$16 billion kitty -- will not go away overnight. That said, the Apple move could impact Pandora with regards to music royalties.

Consider this from Billboard's well-done story on Apple's weekend deal with Warner Music Group:
The agreement with Warner calls for Apple to compensate the company at higher rates than what is currently paid by most Internet radio services such as Pandora, which pays rights holders under a compulsory licensing framework set up in 2009 through Congress, according to executives close to the negotiations. The Recording Industry Association of America has been urging lawmakers to reject Pandora's petition to change the current method for setting royalty rates paid by Internet radio services, which roughly amounts to 0.12 cents per stream.

The agreement calls for two separate deals, one with Warner's labels and another with Warner/Chappell Music Inc., the company's publishing arm. Both were negotiated in parallel, an executive close to the talks said.
The recorded music deal calls for Apple to pay a per-stream rate of around 0.16 cents, similar to the rate Universal Music Group received. Like Universal, Warner also gets a percentage of ad revenue that would be generated by the Apple service, but payments would only begin after the service exceeds a certain audience threshold.
For the publishing deal, Warner/Chappell also negotiated an additional percentage of ad revenue that is more than twice the 4 percent rate paid by Pandora.

This is where things get complicated. Recorded music deals vs. publishing deals. Compulsory vs. direct licensing.

As Billboard explained, Pandora pays a royalty rate, to put it simply, effectively set by the government. The company's beef focuses on the fact that broadcast radio, satellite radio and cable pay much less to license music than Pandora does.
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