Apple Inc. is in talks to license music for a custom-radio service similar to the popular one operated by Pandora Media Inc., according to people familiar with the matter, in what would be a bid by the hardware maker to expand its dominance in online music.
Such services create virtual "stations" that play music similar to a song or artist of the user's choosing, either on Web browsers or smartphone apps. Like traditional radio, they are typically free for users, but incorporate advertisements.
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An Apple spokesman declined to comment.
Several online music services, including Spotify AB and Clear Channel Communications Inc.'s iHeartRadio, have recently added Pandora-like custom radio features.
But Apple's outsize presence in online-music sales and massive installed base of MP3 players, smartphones, tablets and computers could make it a much more serious threat to Pandora than any of its current would-be rivals.
Apple only recently initiated licensing negotiations with record labels for its putative service and, even if it does complete deals, it could be a matter of months before such a service might launch, according to these people.
The company has in the past contemplated and abandoned other interactive features, including a Spotify-like service that would have let users rent unlimited amounts of music for a fixed monthly fee. But people familiar with the current talks say they appear to be more serious than those previous tentative inquiries.
As on Pandora, the music would be interspersed with ads, in this case carried by Apple's iAd platform, which syndicates ads to iPhone and iPad apps.
Apple has dominated the sale of song downloads since 2003 when it launched what was then the iTunes Music Store. It has since become the largest music retailer, physical or digital, in the world. But if services like Pandora and Spotify gain popularity, Apple could lose its edge.
The sky-high royalty costs associated with online radio have prevented Pandora from ever reporting a profit. In the three months ended July 31, the company said it lost $5.4 million on $101.3 million revenue. The company's content-acquisition costs for the period increased 79% compared with the same quarter in 2011, far outstripping its revenue growth of 51%.
Pandora pays royalties based on rates set by an arm of the federal government, rather than negotiating separate licenses with the record labels that control music.
Apple is negotiating for its own licensing deals with record companies, these people said, because it wants to offer users a greater degree of interactivity than allowed by so-called compulsory licenses used by Pandora and other webcasters.
Going head-to-head with Pandora pits Apple against one of the only other companies to gain real consumer traction in online music. According to a recent consumer survey by Nielsen Co., more adults said they use Pandora to listen to music than Apple's iTunes.
The licenses Apple is seeking may let it sidestep certain restrictions that typically apply to online radio, including a ban on playing any given song too frequently. Such a difference could make Apple's service more of a direct competitor to terrestrial radio, which typically repeats a small number of hit songs.
Pandora's 54.9 million active users put it far ahead of other online rivals. Spotify, for instance, recently said it had a total 16 million active users, three-quarters of whom use only its free service, which lets users listen to any music on demand, supported by ads. Four million users pay $10, £10 or €10 a month for a version of the service that includes no ads.
As of June, there were more than 400 million iTunes accounts, according to Apple.
Highlighting the difficulty of making money in ad-supported online music, Spotify said that it made less than 15% of its revenue from ad sales, with the other 85% generated by subscribers who pay for an ad-free version. Even with the benefit of those subscription fees Spotify said it lost €45.4 million ($57.3 million) last year, on €187.8 million revenue.
Apple had considered trying to launch a Pandora competitor in the past as a way to help users discover new music, according to a person familiar with the matter. But the company decided not to because of the licensing costs. Instead, Apple focused on the iTunes Genius service that suggests songs people might like based on what they have purchased.
Pandora has emerged as a leading player in mobile advertising. eMarketer forecasts that Pandora will earn $226.4 million in mobile ad revenue in 2012, compared to $75.1 million for iAd. The figures exclude revenue shared with partners.
Pandora's iPhone app is a major outlet for iAd.
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