In a bid to expand its dominance in online music, Apple is now in talks to license music for a custom-radio service similar to Pandora, according to a Wall Street Journal report citing "people familiar with the matter."

Services such as the one operated by Pandora Media Inc. create virtual radio "stations" that play music of the user's choosing, either on Web browser or smartphone apps. These services are typically free for users, but include advertisements. Apple's Pandora-like service would reportedly work on its high-end hardware family, including the iPhone, iPad, and Mac computers, and possibly even on PCs running Microsoft's Windows OS, according to one of the WSJ's sources. The service will not, however, work on Google's Android operating system, added the insider, highlighting the war Apple is fighting against Android.

A number of other online music services, including Spotify AB and Clear Channel Communications' iHeartRadio, have added Pandora-like custom radio features, but Apple could pose a far more serious threat to Pandora. Apple already has a strong presence in online-music sales, as well as a massive installed base of MP3 players, smartphones, tablets and computers, which make it a much stronger competitor.

Apple has dominated paid song downloads since 2003, when it launched its iTunes Music Store, and has since become the world's largest music retailer. The Cupertino, California-based tech giant could, however, lose its edge if services such as Pandora and Spotify gain more traction, so offering a Pandora-like service would make sense for Apple to stay competitive.

According to the WSJ's sources, Apple only recently started to negotiate licensing with record labels for its service, and even if it completes deals it could still take months to actually launch the service.

Meanwhile, Pandora's shares already took a tumble following the Journal's report, as shareholders started to worry about the great impact an Apple radio service could have. The steep royalty rates associated with online radio have prevented Pandora from ever turning a profit, but Apple could afford to maximize this business. Pandora reported a loss of $5.4 million on $101.3 million revenue in the three months ended July 31. Moreover, the company's content-acquisition costs for the same period increased 79 percent from the same quarter last year, while revenue grew just 51 percent.

Pandora does not negotiate separate licenses with the record labels that control music. Instead, it pays royalties based on rates set by an arm of the government. According to the WSJ's sources, Apple is in talks for its own licensing deals with record companies in a bid to offer users a greater level of interactivity than the so-called compulsory licenses used by Pandora allow.

The licenses Apple is reportedly negotiating may allow it to slide past certain restrictions that typically limit online radio, including a ban on playing any one song too frequently. Such a distinction could place Apple in more direct competition with terrestrial radio, which typically repeats a number of hit songs.