Apple’s (NASDAQ:AAPL) iTunes online music store turns 7 in April. It continues to control a 70% share of the digital music market, while competitors like Amazon.com (NASDAQ:AMZN) and Microsoft’s (NASDAQ:MSFT) continue to try to keep pace.
But the music business is changing, as digital sales have begun to slow. Nielsen Soundscan recently reported that digital sales in 2010 amounted to $1.17 billion, essentially flat with a year earlier. With no sales growth in an arena that Apple is already dominating, other companies are exploring new models to accommodate shifts in the audience. Susbcription-based services like Sony’s (NYSE:SNE) Music Unlimited, which offer audiences access to a wide library of songs for a monthly fee, have struggled to find an audience.
As The New York Times recently noted however, it could come down to Internet radio, not exactly a new idea, that ultimately refuels revenue growth in digital music. The proliferation of connected portable devices is freeing up Internet radio from being tethered to PCs, making listeners accessible to businesses and advertisers in a way they haven’t been since the 1990s.
While there saren’t many publicly traded Internet radio companies, here are four companies investors should pay close attention to as Internet radio gains prominence in the broader digital music market.
Pandora Radio is today’s face of the Internet radio market. In the decade since its inception as the Music Genome Project, Pandora Media’s customizable radio — users enter song titles or artist names and the service customizes a station based on those choices — has emerged as one of the most convincing models next to iTunes for monetizing music since the physical media market imploded.
The success of its advertising-supported business (Pandora also offers a paid subscription, ad free option for members) has netted the service an audience of 80 million registered users. Pandora filed with the Securities and Exchange Commission for a $100 million initial public offering last month. A November 2010 report from Ando Media said that among the top 20 Internet radio broadcasters who publish their numbers, Pandora controls more than 50% of the audience from these stations.
As private equity and venture capital turn their eyes to Internet radio, so has the 800-pound gorilla of the traditional radio industry. PaidContent.org reported recently that the media giant would buy Thumbplay Music for what is said to be a fraction of that company’s value. Thumbplay offers a subscription-based service similar to Sony’s, but Clear Channel isn’t interested in that business. It’s going to leverage Thumbplay’s infrastructure to create its own free Internet radio service similar to Pandora that will act as a flagship for the company’s existing iheartradio service. This aggressive development from Clear Channel demonstrates just how potent the Internet radio business is in 2011.
Rumors that the popular European Web-based digital music service Spotify would be coming to the U.S. have been swirling around the Internet since mid-2009. A note from the company last month said that an American version of the service would arrive “in the coming months.” The question is what consumers will get. All Things D says that major labels EMI and Universal Music Group are near licensing deals with Spotify, so content should be assured, but it’s unknown where Spotify users will be able to access the service.
Its business model in Europe is similar to Pandora’s, with a free ad-supported option and a subscription-based premium service that costs about $13.50 a month. The subscription service is much more robust than Pandora’s, though, and the free service is tied to PCs. If Spotify’s American debut includes a version of the free service accessible on a number of mobile devices, it could take off. If it’s banking on the paid subscription service, however, maybe not.
All that’s known about Google’s foray into the digital music business is that it’s coming. Some say it will be a digital download business like iTunes, others say it will be an Internet-based streaming-only service similar to Lala. A recent report on the blog Ars Technica suggests that recent rumors imply a mix of the two. Regardless of the form it will take, Google’s music service will be tightly bound to the mobile operating system Android. Motorola (NYSE:MMI) CEO Sanjay Jha confirmed as much at the Mobile World Congress last month, when he confirmed that Android Honeycomb would feature new “music services.” While a paid-subscription, Internet-based service is likely, a free, ad-supported service like Spotify’s is also a strong candidate for Google’s broader music strategy.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here.