Earlier this month we learned that on-demand music service Rdio was developing a Pandora-like radio feature. Now Bloomberg reports Spotify is also building an ad-supported Internet radio service "that would directly challenge Pandora."

That's according to "two people with knowledge of the situation... who weren't authorized to talk publicly."

An Internet radio service would offer three advantages for Spotify, Bloomberg reports:

1) Spotify could pay lower royalty rates for songs played in a radio setting. 

2) Spotify could play any music it wants thanks to Internet radio's statutory license, unlike its on-demand service which depends on direct licenses and thus allows rightsholders -- like The Beatles, The Black Keys and Adele -- to bar their music from being played (industry attorney David Oxenford has more on this topic here).

3) "An online radio offering would advance Spotify’s strategy of attracting users with free, ad-supported services who can be converted later into paying subscribers," writes Bloomberg, which also points out that Spotify has 10 million registered users worldwide (3 million paying), while Pandora has 150 million registered users.

That echoes arguments from Rdio's VP of Product, who said its users crave a "lean-back" music experience (RAIN coverage here).

There may be the additional benefit that it's easier to monetize an online radio stream. Users may find an audio ad interupting their music more expected and palatable in a radio-like format (like AM/FM), as opposed to the on-demand experience (which is more akin to listening to an album on an iPod or CD player).

Spotify already offers a radio-like service, in which users input an initial artist and Spotify plays similar music. But that service is much more akin to an automatically generated on-demand playlist -- the user can go backwards as well as forwards and bookmark tracks for later on-demand listening.

Bloomberg reports the new radio service will launch within the year. A Spotify spokesperson said they have "no announcements to share at this time." 

Spotify has already begun moving into territory traditionally dominated by radio with the launch of third-party apps from the likes of Last.fm, Rolling Stone, Pitchfork, Soundrop, We Are Hunted and others. Many of the apps create radio-like music line-ups for users, while others offer curated recommendations (RAIN coverage here, here and here).

The takeaway from all this: the web radio format seems to offer many advantages to on-demand music services. Pureplay webcasters like Pandora -- as well as broadcasters hoping to gain audience online -- may face additional competition in the near future.

You can find Bloomberg's report here.