Let the fire sales on digital music begin
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.
Matt Rosoff is an analyst with Directions on Microsoft, where he covers Microsoft's consumer products and corporate news. He's written about the technology industry since 1995, and reviewed the first Rio MP3 player for CNET.com in 1998. He is a member of the CNET Blog Network. Disclosure. You can follow Matt on Twitter @mattrosoff. 
