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Apple's iTunes Radio to launch next month with abundant ads

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With the formal launch of iTunes Radio fast approaching, more details have emerged about how Apple plans to make money from its new streaming audio service.

The answer, in a nutshell, is advertising. But according to a report in AdAge on Tuesday, Cupertino has planned a multi-pronged approach that could easily give competitors like Pandora and Spotify a run for their money.

Apple announced iTunes Radio at WWDC in June, where it was revealed that the service would be available in two flavors: a free, ad-supported version and an ad-free version for iTunes Match subscribers. What wasn't clear was just how much advertising you would be in for if you chose the free option.

According to AdAge, Apple is planning a soft launch. Instead of signing up as many advertisers as it can, it has opted to debut the service with just a few big-name partners, including McDonald's, Nissan, Pepsi, Procter & Gamble, and possibly a few others.

Each of these partners has reportedly been granted exclusivity within their respective industries through the end of 2013 – so don't expect to hear any ads for Coke products on iTunes Radio before next year. Ad industry snoops say the minimum buy-in for one of these coveted slots was around $1m.

Not just audio, either

Initially, at least, the ads will be delivered to every device that can support iTunes radio – meaning anything that can run iTunes, though iDevice fanbois will have to upgrade to iOS 7.

After the launch, advertisers will be able to target specific devices, and the larger the device's screen, the more the ads will cost. What does screen size have to do with it? Well, you didn't think a streaming audio service would only want to serve you audio ads, did you?

No, iTunes Radio will offer a mix of audio and video ads, but according to sources, customers will only see video ads "at times when they are likely to be looking at their device screen," such as when they're fiddling around, skipping tracks and trying to decide what station to tune into next.

The frequency of ads will be conservative, too, at least at first. Cupertino plans to serve up an audio ad about once every 15 minutes and no more than one video ad per hour.

By comparison, Pandora now serves around eight to 12 ads per hour to nonsubscribers, according to research firm Trefis. Of those, only three to four are audio ads, while the rest are "interaction-based display ads."

Traditional commercial radio stations, on the other hand, devote around 13 minutes per hour to advertising, which breaks down to about 25 ad spots per hour at 30 seconds each.

Apple is even planning another, slightly sneaky option for listeners who hate ads but don't want to shell out for iTunes Radio out of their own pockets. Certain of the launch partners will be allowed to curate their own stations, which will have fewer ads.

These custom channels won't be labeled as such, except perhaps for a short audio blurb explaining that this block of radio was brought to you by a certain sponsor. So watch out: if you haven't heard a proper ad on iTunes Radio for a while, you might just be getting your music from McDonald's.

Second time's a charm for Apple's ad platform?

Conventional ads on iTunes Radio will be sold through Apple's iAd mobile ad platform, which could boost Cupertino's fortunes in the ad sales business. Previously, iAd has only traded in display ads for iPhones and iPads and has struggled to compete with the likes of Facebook, Google, Millennial Media, and other, more versatile ad networks.

Actually turning a profit is still another matter. Apple's closest competitor in the streaming-audio space, Pandora, has long railed that the licensing fees charged by music publishers make it near impossible to make money. Cupertino is rumored to have skirted this issue somewhat by cutting side deals with individual record labels, but details are scant.

Apple does have one major advantage over Pandora, however. Its iTunes Store gives iTunes Radio listeners the option of buying copies of songs or albums so that they can listen to them whenever they want. In fact, music sales are thought to be the biggest revenue opportunity for Apple's streaming service – but we shall see.

iTunes Radio is expected to launch on an unspecified date in September. ®

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