May 29, 2003 1:44 PM PDT
Amazon vs. Apple in music downloads?
Online music on the
verge of revolution
At a company shareholders meeting Wednesday, Amazon CEO Jeff Bezos said the e-tailing giant has plans for new stores in the works. He declined to comment on whether those plans include a music-download store, telling the Reuters news service that the idea has been under consideration "for years."
Amazon did not immediately return phone calls seeking comment. But analysts put the company at the top of the list of potential Apple rivals.
"This is a company that was a pioneer in online retailing," said Jupiter Research analyst Michael Gartenberg. "They have got to be looking at the iTunes Music Store and what has made it successful, and whether it makes sense to get into that business."
Since its April 28 launch, Apple's iTunes Music Store has sold 3 million songs. iTunes charges 99 cents for singles and $9.99 for full albums. The pace of sales has slowed to about 100,000 tracks a day, about half of its opening-day volume. Still, the store has raised expectations for a new way of selling music that could turn the tide of online music piracy and remake the recording industry.
Although the jury is still out on how popular and profitable download retailing will be, retailers and others are weighing whether they can or ought to jump on the bandwagon. But replicating Apple's early success won't be easy.
The simplest entry for Amazon would entail partnering with a third party such as Ecast, which has acquired distribution rights for some music and already provides download services for a number of other retailers such as Best Buy and Tower Records.
But those services have so far failed to move much merchandise and would require a significant overhaul to match the ease of using the iTunes Music Store.
Apple embedded its store in its iTunes music jukebox software, putting the ability to buy songs within the same application that consumers use to play and organize their music tracks. That arrangement plays to Apple's strength as an integrated technology company that has complete control over its hardware, software and peripherals--like its iPod portable music player--that underpin and hook into the service.
Although no other company matches Apple's end-to-end control, Web-based music retailers like Amazon may ultimately face a competitive disadvantage compared with companies that provide music software that runs in an application on the desktop. That could lead Amazon to seek a partnership with a jukebox owner, such as Microsoft, RealNetworks, AOL Time Warner or MusicMatch.
"Apple demonstrated that the jukebox is going to be the storefront," said MusicMatch CEO Dennis Mudd. "Anyone not married up with a jukebox will lose out."
Amazon's hurdles don't stop with technology. The company also faces significant business considerations that could slow down its entry into paid music downloads over the short haul.
Amazon already sells music in the form of new and used CDs, and offers a surprisingly large collection of free MP3 downloads to help promote its music products. Selling hundreds of thousands of discounted downloads side by side with traditional CDs would likely eat into its existing music retail sales and complicate its relationships with CD wholesalers.
Music retailers currently benefit from marketing techniques that effectively promote one or two singles on much larger albums that may sell for as much as $18. Offering singles for 99 cents would gut revenues without an offset in volume.
"The problem is that profit margins on each CD sold today are so huge that the companies have to hold on to that model as long as possible," said Matt Rosoff, media analyst at research company Directions on Microsoft.
Although adding downloads could cut into short-term sales, music retailers may have no choice but to find a way to slowly switch over. Worldwide CD sales have been in decline in recent years, dropping from about $39 billion in 1999 to below $32 billion in 2002, according to trade group the International Federation of the Phonographic Industry. That's brought a sense of crisis to the industry.
Amazon doesn't break out music sales in its earnings reports, lumping CD sales along with books, DVDs and magazine subscriptions, among other things. In In 2002, those sales totaled $1.87 billion, up from $1.69 billion in 2001. Pacific Crest Securities analyst Steve Weinstein said music makes up a relatively small proportion of that total compared with book sales, adding that, while CD sales have slumped across the board in recent years, DVD sales have surged.
"It makes total sense for them to do this," Weinstein said.