Apple (NASDAQ: AAPL) released the terms it agreed to with record labels to launch its new iTunes Radio service last week, revealing how it would compensate artists. Apple will pay royalties to record labels based on how often a song gets played on its iRadio service, as well as a portion of advertising revenue -- a deal that the Wall Street Journal called more generous than the one offered by Pandora (NYSE: P), the popular Internet radio service.
In the first year of iTunes Radio, Apple will pay labels 0.13 cents (thirteen-hundreths of a cent) for every time a song is played and 15 percent advertising revenue. That amount will increase to 0.14 cents and 19 percent of ad revenue in the second year. This deal is consistent between major record labels and smaller, independent labels.
Pandora only pays 0.12 cents per play on its free service but said its service and iTunes Radio are so different that it isn’t a fair comparison to make. For example, Apple won’t pay royalties on tracks that users own in their iTunes library or songs promoted in the Heat Seeker feature.
Pandora may also make up the difference in ad revenue. While ads are the primary revenue stream for Pandora, Apple wants to use the iTunes Radio service primarily as a way to drive sales of devices and songs in the iTunes Store.
The week has been a bit of a PR nightmare for Pandora, which has come under a lot of criticism for how it pays for music. Pink Floyd wrote an editorial for USA Today complaining that Pandora was trying to cut the royalties it pays to artists despite impressive growth an IPO that raised $235 million. An article by David Lowery claimed that Pandora only paid him $16.89 for 1 million plays, but others have disputed that math.