• by Erik Sass  @eriksass1, September 7, 2012

Apple is planning to launch a digital radio service to compete with Pandora, including customized listening and on-demand options, according to The Wall Street Journal, citing three unnamed sources familiar with the project.
 
The tech giant, which has formed relationships with most major music publishers in support of its iTunes business, is still negotiating terms for digital music rights for its planned radio service, the same sources tell the WSJ.

As with other digital music services, the central issue will probably be royalties, which have been a point of contention between Pandora and publishers. It still constitutes a major drain on its profitability, as royalty costs more than outweigh advertising revenues.
 
While Pandora eventually broke off negotiations with publishers, opting to pay royalties on a default basis determined by Federal statute, Apple is negotiating directly with publishers, according to the WSJ. The move could make royalties more expensive, but would also give Apple more options in terms of how listeners can interact with music.

Apple would probably seek to offset costs with digital (and possibly display) advertising, and could also offer a subscription model.
 
Even if the business model remains unclear, Apple may feel compelled to establish a presence simply to round out the Apple-branded app offerings for devices, including the iPhone, iPad and iPod. Among other things, a digital radio service could serve as a discovery mechanism that helps drive consumers to purchase songs outright via iTunes.  
 
One thing is clear: The marketplace for digital audio is growing fast. Pandora has signed up about 150 million registered users, at least 33 million people have used Spotify, and Clear Channel’s iHeartRadio has about 45 million listeners per month. Considering that much of this listening happens via Apple devices, a pre-installed radio app that offers a wider range of listening options might make headway against these established players.