iRadio A Long-Term Growth Catalyst

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BTIG analyst Richard Greenfield and his colleagues announced that Apple (NASDAQ: AAPL) will unveil a radio service, similar to Pandora (P). The radio streaming service, dubbed 'iRadio', will be routed through iTunes. Apple's new radio streaming service will increase the company's profitability by increasing sales of its mobile products in the long-term.

The music industry has shifted towards streaming music. Physical sales have gradually declined. In May 2012, Spotify hit 20 million monthly users. It is predicted that Spotify will reach 8 million paid users by May 2013.

iTunes is a hotspot for digital music. Major recording labels (EMI, Sony BMG, Universal Music Group and Warner Music Group) have continued to profit from Apple's iTunes platform. I predict streaming is going to be the next big profit generator for Apple.

Apple Rules The Music Market

According to market research firm NPD Group, iTunes has a market share of 64% in digital music, and nearly 30% of all music sold (both digital and physical) originates from iTunes. When iRadio is launched next year, this number will increase as Apple will make it possible to purchase songs as they are being streamed. Users will click on a button (Apple already collects credit card information of iOS users).

Apple's price to sales ratio of 3.26 and price to book ratio of 4.31 suggest that it is performing well against its competitors. iRadio will enhance interest in Apple's products which are already popular entertainment devices. With a profit margin of 27% and an operating margin of 35%, Apple's profitability is very impressive. In spite of criticism over its maps application, Apple's iPhone 5 sales have surged in China and elsewhere. Apple has a return on assets of 23.61%, which again proves that the company is managed effectively.

iRadio will enable people to purchase music right from their iOS device or iTunes when they stream music. This essentially means people will no longer have to use Pandora, Spotify or even Last.fm and juggle with multiple subscriptions. Last.fm has the unique capability to suggest and recommend music based on what a person likes or has 'scrobbled' (a term which means, to have listened). Apple's iRadio will likely use its Genius feature to recommend and suggest new artists and genres just like Last.fm does. Genius already suggests and recommends people to purchase music based on what they have listened to on iTunes.

Competitors

Apple is dominating the music industry. Bruce Greenwald, a distinguished investor and professor noted in an interview that Amazon (NASDAQ: AMZN) is trading on vapors and has lost a lot of music business after physical sales have declined drastically. Amazon's music business depends heavily on physical CDs and DVDs, which are seeing decreased demand. Microsoft (NASDAQ: MSFT) launched Xbox Music in October 2012. The service allows Windows 8 PC and tablet users to stream music for free, while Xbox owners can stream music ad free for $9.99 per month. Another company that has considered trying music as an approach to generate revenue is Hewlett-Packard (NYSE: HPQ). The company launched its Connected Music service after collaborating with Universal Music. The deal allows HP laptop and PC users to stream music recorded by artists under Universal Music and win exclusive tickets to concerts.

Conclusion

Apple's iRadio will be an added enhancement to the company's music portfolio and will help drive mobile device sales. The iPhone, iPod, and iPad are all deeply embedded in the entertainment business thanks to iTunes, and iRadio. In the long-term, Apple will establish itself as the most important technology company in the field of entertainment.


StockCroc1 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com, Apple, and Microsoft. 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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