The streaming music business is bracing for the entry of a brand-new player — but one that may become an instant giant.

Apple (AAPL) is set to unveil its iTunes Radio service in the United States next month, backed by all its marketing muscle, a decade of experience selling downloadable music and 575 million paying customers.

The long-anticipated move comes just as top streaming services such as Pandora (P), Spotify and Songza appear to have started making a serious dent in sales of digital songs for download, where Apple’s iTunes store is the dominant player.

Overall music sales of albums and singles were down 4.6% in the first half of this year compared to 2012, according to Nielsen SoundScan. That included a 2.3% drop in sales of digital singles. Sales of digital albums rose 6.3%.

Apple has been able to avoid offering a streaming or subscription service until now, thanks to robust download sales. But, as that business peaks, Apple finally has plans to enter the crowded field of streaming players.

No fear from Pandora

Current online music players say they’re not afraid. Pandora CEO Joe Kennedy has dismissed the looming Apple threat. “We’ve seen competitors large and small enter the market and, in some cases, exit the market,” Kennedy told the AllThingsD blog. “I’ve never seen an analysis that identifies an effect from any competitor … we don’t see the picture changing.”

Other competitors have noted that customers tend to use multiple services and that the arrival of a new, highly publicized player could broaden the market for all.

Like Pandora, iTunes Radio won’t let customers choose to play specific songs – that’s the realm of more-expensive services that work on your phone, such as Spotify's premium offering and Google’s (GOOG) Play Music All Access.

Apple’s service will be free with occasional advertisements, though subscribers to its $25 per year iTunes Match feature will get an ad-free version. That’s similar to Pandora, which has 71 million active listeners per month and charges $36 a year for ad removal. Both rates are much less than the services that give users total control over music selection on their phones, such as Google, which charges $10 a month.

The music-matching model

Instead of choosing specific songs, users of iTunes Radio will be able to select a music genre or favorite artist and hear a stream of songs selected to match the choice. A Bruce Springsteen station might mix songs by the Boss along with artists such as Bob Seger or John Cafferty. Listeners can rate each song, helping the services provide ever-more-personalized streams.

That’s still more control than Clear Channel’s iHeartRadio service, which beams users live playlists from the company’s 800 radio stations and others.

Apple’s iTune store already offers an idea of how its radio service might operate, in the “Listeners Also Bought” section, where it suggests additional purchases. Under Justin Timberlake’s new album, The 20/20 Experience, for example, iTunes suggests tracks by Frank Ocean, Rihanna and Adam Lambert among others.

Pandora supporters say Apple won’t be able to match the current leader’s personalization feature, known as genome. Pandora has human reviewers categorize songs along numerous attributes and uses the data to find songs comparable to ones a customer has already liked.

Apple may be able to spread its service to other parts of the world more rapidly than its competitors, thanks to its direct contracts with the big music publishers. Pandora is currently only available in a few countries outside of the U.S., due to rights issues.

Though iTunes radio will initially only be available in the U.S., analysts expect a roll-out in Europe by the end of the year and other markets in 2014.

So, despite Apple’s late entry to the online streaming game, that could make the newcomer into a global giant.

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