Apple Moves to Launch Music Service, Pandora Plummets

Pandora tock fell off a cliff Thursday — closing down almost 12 percent — on reports that Apple is on track to launch a free streaming service in the first quarter of 2013.

Apple Moves to Launch Music Service, Pandora Plummets
Source: Pandora

CNBC first reported in early September that Apple was in talks with the music labels to launch a free, ad-supported streaming music service. On Thursday, Bloomberg reported that talks were on track to close at the end of November, with a service launching as early as January.

(Click here to get the latest quotes from Pandora.)

Not so fast — on Thursday, my sources told me that those talks are ongoing but that at this point they're not advanced enough for deals to close before December. Therefore, a service probably wouldn't launch until February at the earliest. (Read More: Apple Plans Web Radio Challenge to Pandora.)

One music industry source said Apple wants to launch its service around the Grammy Awards on Feb. 10, and that it would launch if it had deals with the two biggest labels — Universal Music and Sony Music — even if the others aren't on board.

Apple's service would be free and ad-supported, and sources said that Apple would pay the labels a licensing fee upfront and do an advertising revenue share. It wouldn't be a true Internet radio service, like Pandora or MOG, which could be why Pandora rebounded a bit after that initial drop.

True Internet radio services are regulated by the government with fixed fees and limits on the number of times per hour a song can be played. The fact that Apple is negotiating with the labels directly means it's more likely to be an on-demand streaming service like Spotify. Still, one could argue that any free music service is competition for Pandora. And it doesn't help that a big chunk of Pandora's traffic comes from Apple devices. (Read More: Pandora Well Positioned for Mobile Growth: CEO.)

One point of concern for the labels in these negotiations: Apple doesn't currently have a dedicated ad sales team in place for the service, and it doesn't have the greatest track record when it comes to advertising. (Its iAd venture was a disappointment, and now Apple lags both Google and Facebook in mobile advertising). That said, mobile advertising is a huge growth area, as we heard in both Googleand Facebook's earnings. And it certainly makes sense for Apple to find a new way to tap into growing marketer demand to reach people on their iPhones.

Apple isn't the only company looking to get into the streaming music business. Microsoft just announced its big XBox Music launch to go along with Windows 8. The four new music services includes a free ad-supported music option. (Read More: Microsoft Jumps Into Music With the XBox.)

Microsoft is offering the free service to draw consumers into its music ecosystem, with the hope it'll help sell devices. Apple already has people hooked with iTunes, but if it's going to keep selling songs it needs to make sure people are turning to its products for free streaming, not Spotify, Pandora, or Microsoft.

Now we're watching to see if Apple can wrap up these negotiations in time for a well-timed Grammys launch.

—By CNBC's Julia Boorstin

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