Bloomberg News

Apple Said to Shift Ad Focus to Support New Music Service

June 04, 2013

Apple Said to Shift Ad Focus to Support Music-Streaming Service

A man with Apple Inc. headphones as he passes an Apple store. Photographer: Andrey Rudakov/Bloomberg

Apple Inc. (AAPL:US), planning to unveil a music-streaming service next week, is revamping how it sells mobile advertising to cater to businesses eager to reach customers as they listen to songs, people familiar with the changes said.

Engineers and sales staff in Apple’s iAd business have been charged with supporting the new digital-radio service, which the company plans to debut as early as June 10 at its annual developers conference, said the people, who asked not to be named because the moves aren’t public. The music service won’t be publicly available until later this year, when Apple’s iOS 7 mobile-operating system is released, one person said.

Apple Chief Executive Officer Tim Cook is shifting how the company courts advertisers after failing to make much headway against Google Inc. (GOOG:US) in the $4.11 billion U.S. mobile-ad market. Apple will seek to land big brands for the new streaming-radio service -- akin to Pandora Media Inc. (P:US)’s business model --scaling back its role as a network that places marketing messages in mobile software from its App Store.

Apple, based in Cupertino, California, has been negotiating with advertising companies including Omnicom Group Inc. (OMC:US)’s OMD to secure brands that will run campaigns on the radio service, one person said.

Trudy Muller, a spokeswoman for Apple, declined to comment.

Pandora shares dropped (P:US) 5.5 percent to $14.39 at the close in New York, adding to an 11 percent decline yesterday after CNET and the New York Times reported on Apple’s progress in talks for music rights for a competing service. Apple fell less than 1 percent today to $449.31.

App Developers

Apple’s iAd distributes ads to third-party developers who use it to make money from their programs sold in Apple’s App Store. Ads can be targeted to users based on what software applications, music, movies and books a customer has downloaded from the App Store and iTunes for use on their iPhones, iPads and iPods (AAPL:US).

Still, the iAd network has had trouble wooing and keeping marquee brands because it doesn’t provide companies as much control about which apps will run their ads; it can cost more than rival services; and the ads are only carried within apps on Apple’s family of mobile products.

Apple intends to make its new radio service free to users and supported by advertising, similar to how Pandora’s mobile app works, people familiar with the plans said. The new service will be different from Apple’s iTunes in that the songs played won’t be limited to what a user has purchased, and listeners won’t own the songs they stream for free.

The shift in iAd’s focus to buttress the music service is being made by Eddy Cue, the senior vice president who oversees iTunes, App Store and iAd, as well as Todd Teresi, whom Apple hired last year from Adobe Systems Inc. (ADBE:US) to lead the company’s advertising business.

Users’ Tastes

Apple’s music service will stream songs based on a user’s tastes. Like Pandora, a station can be created based on a particular song or artist, and the program will then play other songs based on those preferences. It will be tightly integrated with iTunes, so a person can easily download a song they hear that they want to buy, people familiar with the service have said.

Apple has been negotiating with music companies to secure the licensing agreements needed to introduce the service. The company has reached agreements with Universal Music Group’s record labels and Warner Music Group, according to people familiar with the talks.

Initial Partners

Companies that agree to advertise at the start of the new radio service will be doing so in part to be an initial partner of Apple’s, similar to how companies such as AT&T Inc. and Best Buy Co. (BBY:US) were among the first iAd participants in 2010, said a person involved in those first deals. Apple and the advertising brands won’t know how popular the new music offering will be with customers -- or by extension, how much reach the ads will have -- until it’s on the market for a while, this person said.

The U.S. mobile-advertising business reached $4.11 billion last year and will grow to $7.29 billion this year, with Google projected to bring in more than half of that revenue, according to EMarketer Inc. Apple’s iAd will garner $212.9 million in 2013, the researcher estimates.

Pandora, based in Oakland, California, had 70.1 million active users and generated $83.9 million in mobile revenue in the first quarter.

Having Apple’s iAd team focus on the radio service is a step back from how Apple co-founder Steve Jobs had initially envisioned the service. Jobs, who bought mobile-ad network Quattro Wireless to start an advertising platform in 2010, wanted the service to help developers make money so they would remain committed to making software for Apple’s products. Apple shares about 60 percent of each iAd sale with developers.

Radio Support

Apple’s sales team is now directing its attention to getting big brands to support the radio service, with revenue to be shared with music companies. Some members of the iAd group, which has more than 200 employees, have long sought tighter integration with iTunes so the group could sell ads to entertainment companies that would link directly back to iTunes, said one former iAd member.

Even as it emphasizes the music products, Apple will continue to sell ads to be carried within apps. One of the most successful pieces of the iAd platform lets app makers advertise to attract more downloads, a program called iAd for Developers. Last week, Apple’s Cook said in an interview at the D: All Things Digital conference that advertising isn’t a core business for Apple. The service was intended to make money for developers, he said -- not Apple.

Eliminating Fees

The company has taken steps to be more flexible with advertisers to get more business. Apple has required marketers to pay a fee for each 1,000 times an advertisement is placed in an app, plus an additional $2 for every time a customer clicks that ad. In some cases, Apple has eliminated one of those charges, one person familiar with the company said.

Apple also has cut prices so that media agencies can spend $1 million and use the purchased space for different advertising clients. And Apple started taking ad business from companies that sell alcohol, something Jobs resisted after creating iAd, said one person.

The company has pitched its network to advertisers by emphasizing the data it has at its disposal for targeting, including a history of the movies, music, books and applications a customer downloads. The music service may be more appealing because it’s a service that will be run by Apple, not outside developers, easing some companies’ concerns that they lack control over which third-party apps would carry their ad campaigns.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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