Rdio partners with Cumulus -- but will it be enough?

September 17, 2013: 9:19 AM ET

Partnering with a big radio company will give Rdio a big leg-up to take on Spotify, but that might not mean much in the tough market for recorded music.

130917091640-rdio-620xaFORTUNE -- By most accounts, no music-streaming service is making money, and with huge players piling into the business -- including Apple (AAPL), Google (GOOG), and Microsoft (MSFT)-- things will only get tougher for services such as Spotify, Pandora (P), Rhapsody and Rdio.

The problem is that the real, retail-market price of music is still headed downward, while the music labels are still demanding huge (perhaps unreasonable) royalties from the streamers. Selling ads against streaming services hasn't worked so far, and neither has charging users fees for ad-free listening. The larger players consider streaming to be a loss-leader: For example, Apple hopes to get people to pay for downloads of music they'll hear on iTunes Radio and, more importantly, get them to buy iPods and iPhones. It doesn't expect to make money from iTunes Radio itself.

Given all this, it's hard to know what to make of the news, reported by The New York Times, that Cumulus (CMLS), a big corporate radio-station owner, is partnering with Rdio and taking a "significant" equity stake in Rdio's parent, Pulser Media. The service will allow Rdio to offer a free service, financed by advertising. Until now, it's been exclusively a paid service, at $10 a month for mobile listening.

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A major benefit to Rdio will be Cumulus's army of 1,500 ad sales people who will sell space for the service, on top of the ads they sell for the company's 525 stations. Rdio will also get access to Cumulus's programming, and promotion from its stations. No cash is changing hands in the deal. "Further terms were not disclosed, but the value of Cumulus's content and services is estimated at more than $100 million," the Times reported. The companies will share ad revenue.

At this point, Rdio (which doesn't disclose subscriber numbers or finances) is thought to be well behind the leading music-subscription service, Spotify, which claims 24 million users -- nearly 7 million of whom pay a monthly fee. But Rdio is ahead of other subscription-based services (as opposed to Internet radio services like Pandora), such as Rhapsody and Mog. Offering a free, ad-supported service will likely boost Rdio's subscriber base and help it compete more directly with Spotify and others, but it might not help improve margins.

Rhapsody, which is the oldest paid subscription service still operating, is undergoing a management shakeup and is looking to replace its president, John Irwin, The Verge reported last week. Turntable.fm, meanwhile, seems to be tottering on the brink and has shut down the ability for its users to upload music. Turntable.fm is a rather gimmicky service that allows user to upload and share music among themselves. But it faces the same challenges as the others in paying royalties.

Once iTunes Radio is up and running (the launch is expected to happen this week), it might just be a matter of time before a major shakeout in the music-streaming business. It's hard to compete against giant, cash-rich companies that don't care whether they make a profit.

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