Friday, October 26, 2012

Pandora Media Inc (NYSE:P): Record companies want Apple (AAPL) to pay higher royalty rates for web radio content

Apple Inc. (NASDAQ:AAPL) has been flirting with the idea of offering Internet radio services for some time now but somehow the idea has not really taken off, especially with labels.

The iPhone maker which is trying to get onto web-related services in a big way has been pushing record companies hard to buy its plans for a web radio service, but the response from them has been less than encouraging.

According to a Bloomberg report, Apple's negotiations with the three top labels have "intensified" over an ad-support Web radio service that Apple hopes to launch early next year.

CNET, which followed the story, said that record companies want Apple to offer them better rates than what it is prepared to pay.

"The negotiations are on-going so the terms could change, but the sources said Apple has offered to pay a lower royalty rate than Pandora pays even though it wants to provide iTunes users with the ability to do more with the music than Pandora Media Inc(NYSE:P)’s customers enjoy. Pandora, the leading Internet radio service, pays a statutory rate set by Congress. Under the terms of this rate, Pandora must limit the way users interact with songs, such as capping the number of times they can listen to the same song or an individual artist."

Apple has a habit of really squeezing service providers that it partners with - for instance the kind of arrangement that it has with network carriers for selling its iPhones, leaves the with slim margins.

However content providers like record companies like to call the shots and are not willing to forgo their margins.

According to CNET Apple is willing to offer record companies with a percentage of the ad sales that will be generated by the service.

"CNET's sources say that some of the sector's leaders don't believe the cut Apple put on the table is big enough. Others in the music industry, however, argue it's good for the overall business if Apple takes on Pandora."

Shares of Pandora Media slumped 11.73% to $8.20 in Thursday’s session and made a new low of $7.32. However, the stock has recovered 3% in the pre-open session.

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