This is why Apple wants to launch iRadio

Apple (S AAPL) is still dominating the digital download business, with eight out of ten digital music buyers getting their tracks from iTunes in the fourth quarter of 2012, according to new numbers released Tuesday by the NPD Group. Volume-wise, Apple sold 63 percent of all digital tracks in that quarter, followed by Amazon (s AMZN) as a distant second with 22 percent. Apple wants to maintain that lead and keep its digital download biz healthy — and that’s why it’s looking to launch its own streaming service soon.

iRadio, as the service has been called by some, will reportedly mimic the functionality of Pandora, (s P) offering users continuous streaming with limited interactivity. The company is negotiating directly with record labels as opposed to relying on the type of compulsory licenses that are at the core of Pandora’s business model. That means that Apple might offer its users slightly more functionality and fewer restrictions when it comes to music selection and song skipping.

However, iRadio won’t offer on-demand streaming of complete albums like users have come to expect from full-blown music subscription services like Spotify and Rdio. That’s because the Spotify model directly competes with Apple’s music download business. Pandora, on the other hand, actually helps Apple sell more music.

The NPD Group noted Tuesday that 38 percent of U.S. consumers still think it’s important to own their own music. However, among Pandora users, that number was even higher. Here’s how NPD put it in its press release:

“Among consumers who listened to music on Pandora and other free music-streaming services, 41 percent reported that owning music was important to them; in fact, many free streamers attributed buying more downloads to their discovery on a radio or via an on-demand service.”

The company didn’t make any data available about people who pay for a streaming subscription, but I wouldn’t be surprised to see significantly lower interest in music ownership amongst users who pay for unlimited access.

That’s why it’s smart for Apple to invest in iRadio. The goal is not to kill Pandora, but to actually bring that type of radio service to more users, and keep them from switching to a full-blown access model. In other words: It’s not about Pandora, and all about Spotify.