Hannah Karp and Jessica E. Lessin blogs.WSJ.com 06/26/13
Ahead of its launch of an online radio service Apple circulated terms to independent record labels last week, many of them more generous to the music companies than what rival Pandora Media currently pays.
Apple intends to pay royalties to labels based on a blend of how many times listeners hear their songs and how much advertising Apple sells, according to the terms, which were reviewed by The Wall Street Journal.
During iTunes Radio’s first year, Apple will pay a label 0.13 cents each time a song is played, as well as 15% of net advertising revenue, proportionate to a given label’s share of the music played on iTunes. In the second year, that bumps up to 0.14 cents per listen, plus 19% of ad revenue.
That compares to the 0.12 cents Pandora pays labels per listen on its free service. Apple is also offering music publishers more than twice as much in royalties than Pandora does.
Apple won’t have to pay royalties for some performances of songs that are already in listeners’ iTunes libraries, or songs that might be on an album that a listener owns just part of. Similarly, “Heat Seeker” tracks selected by iTunes for special promotions, are also exempted. Apple also doesn’t have to pay for songs listeners skip before 20 seconds have elapsed. The company only gets to avoid paying royalties for two songs per hour for any given user.
The terms for independent labels are similar but not identical to those given to the three major record companies – Vivendi SA ’s Universal Music Group, Access Industries Inc.’s Warner Music Group and Sony Corp. ’s Sony Music Entertainment – which are expected to receive cash advances against future royalties.
An Apple spokeswoman declined to comment.
Pandora was criticized by members of the band Pink Floyd in a recent USA Today opinion piece for complaining it pays too much in royalties to make a profit and asking artists to support its efforts to get a law passed that would cut the fees it pays.
Pandora founder Tim Westergren said Wednesday that it isn’t fair to compare Apple’s royalty rates with Pandora’s because the services work differently, and that different features on the two services could trigger different royalty payments.
“It’s apples and oranges,” said Mr. Westergren, referring to the two services.
The ad revenue iTunes Radio generates might not necessarily be more significant than Pandora’s. People familiar with Apple’s thinking said the company is primarily hoping that iTunes Radio will encourage listeners to buy the tracks they like at the iTunes Store and help the tech giant sell more iPhones, iPods and other hardware.
Though music sales are slipping fast across the industry with the growth of subscription streaming services that offer unlimited music for a monthly fee, Apple is likely to stick for now to its business model of selling songs on iTunes. That business has become marginally profitable in recent years, these people said – as long as that model remains sustainable.
The new radio service gives Apple a venue to develop its iAd system – a mobile advertising platform for Apple devices that allows third-party developers to embed their apps with ads, these people added.
The iTunes Radio licensing document also includes several references to terms for the use of music in talk, weather, sports and news programming on the new service. The agreement said Apple wouldn’t have to pay the independent labels royalties for snippets of music used in the background of those sorts of programs. But it’s unlikely Apple will invest much in creating such programming, given that it has long shied from creating its own content.
Clear Channel Communications Inc. Chief Executive Bob Pittman said recently that only a tiny fraction of the people who listen to iHeartRadio, Clear Channel’s digital service, listen online to such programming.
Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved