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Watch Out, Pandora: Apple’s Streaming Radio Service Could Launch In Early 2013

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According to a report out of Bloomberg, Apple may be working on a radio product to compete with Pandora. The story cited sources “familiar with the matter,” who confirm that Apple is in intensified talks with major music labels to figure out how to split ad revenue.

The service is expected to launch next year, in 2013.

Obviously, this would be a huge hit to Pandora, which currently owns the crowded Internet radio market. In fact, Pandora’s shares dropped 12 percent yesterday to $8.20.

The idea behind the Apple Internet radio is actually relatively simple. The company already has a foot in the door with most major music labels — iTunes, digital downloads, etc. — and this is just a progression of those talks.

Whereas Pandora, and many of its competitors, use a compulsory license to stream music to users, Apple is looking to forge direct deals with labels for more comprehensive and flexible licensing.

In other words, Apple radio probably won’t ever tell you that you can’t skip a song. And unlike Pandora, if you want to listen to all Johnny Cash, all the time, Apple won’t fold in music that’s similar to Johnny Cash just to follow licensing requirements.

In essence, it is expected to be the best internet radio ever. If real, of course.

Rumors have swirled since September (and earlier) that Apple was working on a Pandora-killing radio product. It’s expected that the service will run as an app for desktop and iOS devices, rather than as a web service.

In the fourth quarter earnings call yesterday, Apple reported that iTunes had hit record revenues, but the company also revealed that iPod sales are down 19 percent year-over-year. Just like CDs, cassette tapes, and 8 tracks before them, digital downloads that take up valuable space on your gadgetry will go out of style.

Of course, new iPods will probably invigorate iTunes even more in the coming quarter, but an extra revenue stream from music (where Apple arguably got its wings and learned to fly) isn’t a bad idea at all.