Earlier this month, the Wall Street Journal reported that Apple is indeed working on a radio streaming service on the order of Pandora. Apple is still in licensing negotiations with record labels, and the service is still reportedly a ways out.
The New York Post is reporting that negotiations with Sony/ATV have stalled out over the fee Apple would pay for each song streamed by its customers. Apple reportedly wants better rates than Pandora and that sales would go through the App Store. Plus Apple is seeking looser restrictions on playing an artist multiple times in a row.
To me, this would be a nice addition to the iTunes music store, but not an outright replacement. People want to “own” their music, and put it on the devices they own. I still insist that record labels will be in serious trouble in the coming decades. The internet can now perform the same functions as a record label, but with not hefty licensing. If your good, you will be noticed on the web.