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What does Apple's possible announcement mean for the future of steaming music?

Streaming Spotify on a phone.

Apple upended the music business when it launched iTunes and let people buy single songs. Now the tech company looks set to take on Pandora and Spotify with its own music-streaming service.

Streamed music is sort of like online radio. You don’t own the songs but you can listen to them as they come along through your computer or smartphone. Services sell ads or subscriptions to generate revenue.

There’s just one problem.

“Nobody has turned a profit on this,” says Michael Robertson, CEO of Dar.fm, a service that allows listeners to record online radio broadcasts. “The [physical] radio industry is a $15 billion industry and only 10 percent has moved online.”

Music labels and artists brought in $4 billion last year from digital sales, but only about 15 percent of it came from streaming.

But, says Mark Mulligan with Midia Consulting, “It’s clearly where the future growth is going to be.” He says 2012 was the first year that revenue from music streaming grew faster than downloads: 59 percent compared to 8 percent. “Apple knows it needs to be in the streaming business if it’s going to have a long term future in music,” Mulligan adds.

Still, there’s that profit problem. Robertson, with Dar.fm, says the main reason for losses so far are “the very high royalties that they’re forced to pay.”

Music streaming services have to pay the record label, artist and songwriter every time that song gets played. Pandora, for example, follows a government-outlined set of rules for using music known as “statutory licensing.”  The company doesn’t have to negotiate terms with record companies or artists, but it does pay them a set fee -- one cent every time a song is played. It adds up.   

Robertson says Apple thinks it can do better, by trying to craft deals with groups like Universal Music and Warner Music that will reduce royalty payments and allow “more functionality, like the ability to rewind or advance or announce the next five songs that are coming up. Things you can’t do on Pandora.”

But Apple’s ultimate goal may not be to sell music, says Leo Toyama, a project manager at Music Ally, a music consultancy in London. “They make their money out of hardware sales,” he points out.

So if Apple gets into music streaming, it’ll be to sell more Apple products on which to stream that music.

About the author

Sabri Ben-Achour is a reporter for Marketplace, based in the New York City bureau. He covers Wall Street, finance, and anything New York and money related.

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