One issue holding up Apple iRadio: The economics of skipping songs

Apple, which has been aiming for a summer rollout of a streaming music service, has hit a negotiating snag with Sony Music over some of the features that it is building into its product.
More specifically, Apple and Sony Music, the world’s second-largest music label, are still trying to hammer out details over how much Apple would pay for songs that people listen to a fraction of and then skip, according to people familiar with the negotiations. There could be other points of contention as well.
Apple’s streaming music service, which most closely resembles Internet radio leader Pandora, has some features built into it that give users added control, such as the ability to rewind a song and skip to the next after listening to a portion of it, sources say.
Sony declined to comment. An Apple spokesperson wasn’t immediately available.
Apple last week reached an agreement with Universal Music, the world’s largest label, and it’s very close to finalizing its deal with Warner Music Group, sources say.
That skipping has become an issue is frustrating executives at the other labels because they see Apple’s free radio service as a potential boon for the music industry overall and are eager to help the company get it launched. Streaming music is the fastest-growing segment of the recorded music industry, and Apple’s offering, designed for the iPhone and linked to iTunes, could speed the growth of Internet radio that much faster.
What also excites some music executives about Apple’s planned service is that it includes two other streams of revenue, adding up to an overall deal that should be far sweeter than what the labels get from Pandora. That includes a quick way for users to purchase a song they’re listening to, and a slice of the ad revenue that Apple earns. Apple has told the music labels that it plans to build out its iAd business, including the potential of adding audio ads such as those heard on Pandora’s free service.

All this comes as Apple is feeling more pressure. Google this week rolled out a Spotify-like subscription music service, and, according to sources, is gearing up to launch another music service tied to YouTube.
In some ways, Apple is in this bind with Sony because it’s doing direct deals with the music labels instead of taking the Pandora route, which has its terms set by federal statute — a setup that the labels dislike because it makes them little money and limits Pandora’s ability to expand. While Pandora is available in the U.S., and, more recently, in Australia and New Zealand, Apple is aiming to quickly roll out the service in at least a dozen countries.
Even Pandora’s song-skipping rules are set under the 1996 Digital Millennium Copyright Act. Free Pandora accounts permit six skips per hour per station, for up to 12 total skips per day across all stations. What exactly is a skip? It’s not just if you skip the song, but if you give it a thumbs-down rating or choose “I’m tired of this track” in the menu. In any of those instances, Pandora must pay full royalties for the song, even if it only plays for a few seconds.
While it’s unclear what Sony is asking for, it’s certainly seeking better terms than what it gets from Pandora. And if Apple bends for Sony on this issue, it would cause problems with its deals with Warner and Universal. Apple currently has the same licensing deals with the major labels and publishers — where Apple pays the rights holders 70 percent of every dollar it brings in — and it’s seeking a uniform deal for its new service as well.

Sony Music CEO Doug Morris in April.

(Credit: Getty Image)

The man who now runs Sony Music is longtime industry honcho Doug Morris, who used to head up Universal. Over the years, Morris has been at odds with Apple, once reportedly saying that “we got rolled like a bunch of puppies” by the late Steve Jobs, who struck the initial deals for iTunes.
That was a long time ago. More recently, Morris talked up the importance of streaming and digital music in general, as he did in this recent profile in BloombergBusinessWeek. So it’s hard to tell how much of Sony’s current stance is a basic negotiating tactic, or ongoing suspicion when it comes to dealing with the still-powerful Apple.