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Two interesting pieces of news highlight the trouble online stores will face as the price of legal song downloads approaches the price of illegal downloads (which is zero).

On Monday, Amazon.com announced an extremely generous revenue-sharing program for affiliate sites to resell MP3s from the Amazon MP3 store. Amazon will give them 20 percent of the revenue from all sales until January 1, 2008, after which it will drop to 10 percent. Since Amazon sells some downloads for as low as 89 cents, this means it'll have only 71 cents left to pay to the copyright owners. I don't know exactly what the wholesale price of these per-song downloads is, but I expect that Amazon will barely break even, and perhaps lose money, on this deal.

The same day, Ars Technica reported a rumor that Apple was planning to drop prices on iTunes Plus songs to 99 cents, the same price as all other songs on the service. Like Amazon's MP3s, these files have no DRM, meaning they can be played on any computer or device that's capable of playing AAC files. (Amazon's MP3s are more broadly compatible--for instance, many Windows Media-based MP3 players can't play AAC files.) On Tuesday, Steve Jobs confirmed the rumor to The Wall Street Journal shortly thereafter. I don't think EMI's charging Apple more for the DRM-less files than the other labels are charging for their content, but the price drop suggests that Apple's feeling the competition from Amazon.

Prices will probably continue to drop until the retailers have no margin left. In other words, to make a business out of selling digital music, you have to have an attached product that's actually profitable. In Apple's case, it's hardware. In Amazon's case, they must be hoping it draws users to the site, where they eventually will buy other products. That's been Amazon's strategy from day one--I used to work in a bookstore, and retailers' margins on books are exceptionally low relative to the retail price of the book. I remember wondering how the heck Amazon was going to turn online bookselling into a viable business, but of course they have with massive scale and significant attach of other products.

Remember when Amazon.com was just a bookstore? On Tuesday morning, the online retailer launched the public beta of its much-anticipated rival to Apple's iTunes Store: Amazon MP3, which features over 2 million songs free of digital rights management copy protection, which means they'll play on any computer, music player, or music-enabled cell phone.

Because of Amazon MP3's DRM-free focus, that means the selection isn't as wide as the iTunes Store's. Several major-label conglomerates, like Sony BMG and Warner Music Group, have not jumped onto the bandwagon and hence aren't offering their music for sale in Amazon's new store. Nevertheless, the retail giant has played up the fact that there are still 180,000 artists represented from 20,000 major and independent labels, including several prominent indie labels that are offering their music for the first time in "naked" format.

Each song is encoded at 256kbps, the file quality that Apple offers for its DRM-free iTunes Plus premium music selections, which it sells for $1.29 apiece rather than its usual 99 cents. Amazon's pricing for Amazon MP3 ranges from 89 cents (including the top 100 best-selling songs) to 99 cents; albums are priced from $5.99 to $9.99.

It goes without saying that Amazon is aiming squarely at Apple, and it's attempting to hit the digital music monopoly where it hurts--with regard to pricing, file quality, and versatility, all of which have come under scrutiny by critics. But this could also be a painful blow for eMusic, the online music store that has made a small name for itself by selling exclusively DRM-free music.

While the iTunes Store started its digital download empire with music sales, Amazon has already operated a movie download store, Amazon Unbox, for a year now. Unbox was off to a rough start at first, but tweaked features, partnerships with companies like TiVo, and a solid selection have improved the company's reputation for media downloads.

[This entry has been revised: I didn't read the MediaNet release carefully enough...they are offering DRM-less MP3s, not WMA files. Apologies to anybody whom I misled. My bad.]

Back in May, EMI--one of the big four record labels--agreed to sell its songs through Apple's iTunes without digital rights management (DRM) protection.

Before this move, iTunes and the iPod were technically linked: if you bought a song from iTunes, you could only play it on an iPod (unless you burned it to CD then re-ripped it into an unprotected format). Offering DRM-less downloads severed this link, allowing users to play downloaded iTunes songs directly on a Zune player (one of the few portable players other than the iPod to support AAC), and making the MP3 conversion process easier. But by and large, the landscape didn't change much. The iPod already has 70 percent+ of the market, so there just isn't much demand for playing iTunes songs on other types of devices.

Today, MediaNet announced that it, too, has licensed more than 1 million DRM-free tracks from EMI. MediaNet, which just changed its name from MusicNet, is the back-end store for most of the second-tier music download stores (iTunes is the only tier-one store, with something like 80 percent market share), including Yahoo Music, MTV Urge (heavily promoted by Microsoft before it launched its own Zune player and store), and Samsung Digital Connect (Samsung's response to Zune).

Equally important, the DRM-less downloads on the MediaNet stores will be in the MP3 format. While AAC (and Windows Media Audio, for that matter) offers a much better quality-to-compression ratio, MP3 is supported by all portable players, all digital media software for all computer platforms, and far more consumer electronics devices than any other compressed digital format. This could actually change the landscape: paid downloads, from one of the major labels, playable on an iPod, from a source other than iTunes. That's new.

The challenge to iTunes' hegemony could accelerate when Amazon launches its MP3-based store later this year. If EMI and the other smaller labels offering DRM-less MP3s begin to see their digital sales rise, then the other big labels might follow suit. And once all tracks are available in DRM-less MP3 format, the only differentiator for the iTunes store is the fact that it's integrated with the iTunes software, which is required to use an iPod (or iPhone). That integration should be enough to keep iTunes in the lead, but now these other stores have a fighting chance to compete on pricing and selection.