How Apple's iRadio Could Pose a Problem for Pandora

NEW YORK ( TheStreet) -- Apple's ( AAPL) imminent move into Internet radio could, if it further moderates Pandora's ( P) 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.

Like Spotify, Apple negotiated, and is negotiating, direct deals with the music industry. If published reports are true and the negotiations play out as expected, Apple will be paying more for music across the board than Pandora does.

But, remember, Pandora pays the compulsory rate. That's the route it chose to go. Relative to companies that do direct deals, Pandora actually has a sweet deal, just not in comparison to broadcast, satellite and cable.

There's no question, however, that with Apple willing to pay more than Pandora does (it is interesting to see Apple in a position where it must concede at least a little) it puts Pandora in a tough spot as it makes an argument for a more equitable payment structure. It still has a strong case when it compares itself to broadcast, satellite and cable, but a much weaker one next to much of the rest of Internet radio, which pays more than Pandora.

But again, don't lose sight of the distinction between the various methods of paying royalties, particularly compulsory vs. direct licensing. The industry might require a fundamental overhaul of this somewhat convoluted structure.

But, despite rhetoric over royalties, the music industry doesn't hate Pandora. It still cuts deals with the company. Consider, most recently, Pandora Premieres, which provides listeners early, full-length access to new albums one week before their official release.

However it plays out, expect Pandora to continue to grow as a key partner for the music industry, for major names as well as local/indie acts. That's an often overlooked key to success in the digital age of music . . . striking a balance between disruption of and partnership with the music industrial complex.

With or without Apple, Pandora has major plans to do more of both -- disrupt and partner -- as it enters the next phase of its maturation as a company. That could mean more revenue, a lead role in righting some of the music industry's wrongs, more records sold, more concert tickets purchased and an even stronger bond between music listener and the diverse mix of Internet radio platforms that Apple will most likely only make richer.

-- Written by Rocco Pendola in Santa Monica, Calif.
Rocco Pendola is TheStreet's Director of Social Media. Pendola's daily contributions to TheStreet frequently appear on CNBC and at various top online properties, such as Forbes.