Content Gold Lures the Cash From Apple

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the next big “things” from Apple (NASDAQ: AAPL) is going to be its iTunes Radio service, an advertising supported radio scheme similar to Pandora (NYSE: P)Sony (NYSE: SNE) is rumored to have been the last industry holdout, winning it an above-industry ad cut.


Apple has been looking for the next big tech gadget for some time, and hasn't found it yet. Instead, it is shifting more toward services. A big one is going to be a me-too service that will stream music over the web. Being a copycat isn't a bad thing because the company can automatically put the advertising-supported service on every device it sells.

That will create an instant customer base for the free service. It also creates a valuable showcase for music that can be purchased, likely with a convenient link, through the iTunes store. Bloomberg quotes NPD Group as saying that Apple has over 60% share of the music downloading market. So, adding an Internet “radio” service is a great way to try to boost that share.

The holdout

According to Bloomberg, the big holdout for the iTunes Radio service was Sony. The company has a massive collection of music and was rumored to be given a 10% share of the ad revenue surrounding its content. That's more than twice the average in the music streaming sector. It shows the value of Sony's content in a changing online world.

It also helps explain why hedge fund activist Daniel Loeb is pushing Sony to break its business into a content company and an electronics company. That said, it also shows why such a move would be ill advised. Sony is set to launch PlayStation 4, which should help position the company in customers' living rooms. It needs a deep content bench if it wants PlayStation to move beyond gamers to become a family entertainment hub.

Sony shares have been moving higher since Loeb started lobbying around, but are well off their all-time highs. The company still has a lot of work to do to turn the business around, but now could be a good time to jump aboard for long-term investors and those seeking a turnaround play. The iTunes Radio deal is just one more example of the company's content strength.

More services

For Apple, the iTunes Radio idea extends its ecosystem. It isn't likely to be a game changing offering, but it keeps customers in the Apple sphere of influence, while at the same time, provides the company with a new revenue stream. That's a good thing since concern about the top line has resulted in a notable share price decline over the last year or so.

Although the company's new dividend policy, debt issuance, and share buyback plans hint at a change in its self perception, that doesn't mean it is a bad investment. In fact, with a yield of around 2.80%, the shares should have a pretty solid floor under them. Sales, meanwhile, are still quite strong and the company is robustly profitable.

Investors got carried away when they drove the price up to $700. However, the shares appear reasonably priced today. Growth and income investors should take a look.

The loser

The big loser in this deal is likely Pandora Media. When the Pandora service was introduced, the online radio concept was revolutionary. It isn't anymore. The company has a first mover advantage and name recognition, but Apple has an installed base of devices with which Pandora can't compete. In fact, Pandora's users have to seek its service out. And, iTunes Radio will be closely tied to iTunes, further enhancing Apple's model.

Although Pandora's top line has been growing steadily, its bottom line has been going in the opposite direction. With a money losing business, any defection from Pandora to Apple will be a big issue. Investors should probably avoid Pandora shares until the impact of Apple's iTunes Radio is clear.

The big winner

Sony is probably the big winner in the iTunes Radio launch. Not only does the deal show just how valuable the company's content is, but it should give the company that much more time to turn its consumer electronics business around. Apple, of course, will benefit, since iTunes Radio moves the company more toward annuity-like services revenue streams, which will help reduce its reliance on device sales. Pandora's money losing service, meanwhile, just found a new problem to deal with.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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