iTunes Radio will launch in the US with an advertising revenue model that will reportedly display an ad to users once every 15 minutes, including one video ad an hour.
Apple’s entry to the world of internet radio, iTunes Radio, is set for a September launch in the US and will boast an advertising model with a number of blue-chip companies already on board.
The costs for ads will vary according to the screen size of the device used to stream the music with Apple TV apparently delivering the highest premium.
According to Madison Avenue scuttlebutt, ad packages will start at $1 million for a 12-month commitment and those already signed up include McDonald’s, Pepsi, Nissan, Procter & Gamble.
At present of course, the leader in internet radio is Pandora which is taking the arrival of Apple's doubtless beautifully designed tanks on its lawn with the kind of considerable calm that can only come from knowing that this day was always going to dawn.
The party line from Pandora CEO Joe Kennedy is one that's been well-rehearsed in any market segment where the enfant terrible is suddenly confronted by the establishment figure: this just validates what we've been doing.
So it is with the advertising potential of internet radio, argues Kennedy:
"Apple’s entrance highlights the advantages of it. It highlights the future of connected radio as a primary advertising vehicle, and we believe we are going to play an important part of that for a long time to come. And so that to the extent it expands that, it will help our opportunity."
That said, Apple is reported to be undercutting Pandora's premium ad CPMs by offering its iAds at an 80% discount according to a Bank of America Research report while the Wall Street Journal reports that Apple's contracts with the three largest music labels - Universal Music Group, Warner Music Group, and Sony Music Entertainment - offer better terms than Pandora over the next two years.
Pandora reckons its achievements over the past eight years give it a solid foundation upon which to mount any defence of its market position. Certainly the stats are impressive:
- Over 200 million registered users
- More than 70 million active listeners
- A dominant 70% share of the US internet radio market today.
- More than 5 billion stations created by listeners.
- More than 30 billion pieces of feedback received from users.
- In July alone, Pandora listeners logged more than 1.28 billion listening hours.
- That translates to nearly 17 hours of listening per month for the average user.
These numbers allow Pandora CFO Mike Herring to stake a claim that when compared to terrestrial radio Pandora is effectively the number one radio station in most major markets across the US with more than 7% national market share.
Equally important, he argues that Pandora is now one of the largest mobile media advertising platforms in the world. In its most recent quarter, non-GAAP mobile revenue exceeded $100 million for the first time. That's a 92% year on year increase to take the total to $116 million.
Herring states that momentum has been helped by technology integrations with major media buying platforms with the result that advertising agencies are increasingly adding Pandora to broadcast media availability. He says:
"Importantly, we have eased the friction associated with buying Pandora by integrating with the technology systems and processes broadcast and radio buyers use most often, allowing advertisers to buy Pandora using metrics and measurement of radio or digital whichever meets their needs. To close the loop on the entire media planning, buying, and transacting process, transactions can now be completed electronically."
"We have developed a proprietary order management system called Slingshot, which allows us to take a transaction from proposal to invoice using the buying methodology that works best for the advertiser.
"Our progress with our technology integration has undoubtedly increased our advertising momentum.
"Our native ad units combined with targeting and attribution capabilities and the scale of our platform are key to our success."
It's also critical to get the optimal balance right between listening to music and listening to ads so as not to alienate the end user, explains Herring.
"Our research indicates that listeners prefer longer periods of uninterrupted music so we’re gradually rolling out a back to back audio ad format. This new format provides listeners with longer music suites and fewer total music interruptions while increasing advertising inventory.
"We began rolling this out to a very small segment of our listener community last week. This change is consistent with this strategy; we have had in place for the last several years, very gradually increasing the amount of audio ad inventory on Pandora as our sales capacity grows while staying focused on delivering the best personalized radio experience to the listener."
And if you don't want any ads at all, there's a subscription alternative called Pandora One which can now be purchased through in-app functionality.
Localisation is another critical success factor, argues Kennedy, and local ad content now accounts for 60% of total advertising revenue. He explains:
"We still have very strong digital revenue and we’re still selling quite a bit of advertising through the digital channels as well as the broadcast channels. It's just the tip of the spear in terms of driving growth in 2013 so far.
"The CPMs however tend to go from low to mid single-digits on a national account when you are talking audio up to the high-teens on a local basis. So, we have pursued the local advertising dollars not just because it is such a wide open market opportunity for our native ad products, but because the pricing power in those local markets is very attractive."
Kennedy also plays up Pandora's investment in the internet of things, disclosing that more than 13% of our usage comes from a connected device other than a smartphone or PC. He cites the firm's focus on automotive technology integration as a case in point:
"Since 2010, Pandora’s automotive specific integrations have been activated more than 2.5 million times across 23 major automotive brands and 8 aftermarket manufacturers.
"Pandora is now seamlessly integrated in over 100 car models with the native in-dash entertainment system. We estimate that probably one-third of all new cars sold in 2013 in the US will have this Pandora capability."
At the end of the day, Pandora has an interesting balancing act to pull off even before Apple moves onto its turf.
Ad-supported, free models are only profitable by increasing premium ad sell-through or increasing the number of ads per hour - which then runs the risk of diminishing the listening experience.
What then should be made of a dramatic reversal of policy this week?
Back in February, Pandora introduced a mobile listening cap of 40 hours free for customers unwilling to pay for an ad free Pandora One subscription.
With Apple looming in the wings, there's been a rapid rethink on that and from next month all users will have unlimited use, complete with ads.
Pandora said it made the change in February to cover the costs of per-track royalty fees, which it said had risen more than 25% over the previous 3 years and would increase an additional 16% over the next two years.
According to Herring, a mere six months later and Pandora now reckons its advertising revenues can absorb those costs. Herring explains:
"When we introduced the 40 hour mobile listening limit, we were confident that our scale – over 7% of total radio listening and Pandora’s number one ranking in most major markets – would allow us to take this action without impacting our key monetization initiatives in driving the disruption of the radio advertising market and driving our mobile advertising leadership.
"As our results have shown, the continued strong growth in our advertising revenue allowed us to cover the increased royalty costs with dollars left over to invest back into the business. With these tools in hand, and insight into how they work, we are resetting our levers in September."
More cynical observers might ask themselves if Pandora just blinked first…