Analysis: Amazon MP3 may emerge as iTunes rival

It boasts a DRM-free selection, variable pricing, and cross-platform compatibility. But does the new digital music service from Amazon.com have what it takes to go toe-to-toe with the 800-pound gorilla of the digital music retail world, Apple’s iTunes Store?

For other online music services, the answer to that question has been an emphatic “no.” Despite facing a steady stream of challengers, Apple’s iTunes continues to dominate the market. It's the top online store in all 22 countries it operates in, with users downloading more than 3 billion songs. iTunes has grown so large, it’s now the third-largest music retailer in the U.S. trailing only Wal-Mart and Best Buy.

Amazon MP3 is the latest service looking to take a chunk out of iTunes’ business. Amazon.com launched a public beta of the service last week. Amazon MP3 debuted with a catalog 2 million songs from independent labels and two major labels—EMI Music and Universal Music Group. That’s allowing Amazon to offer downloads that are free of digital rights management technology.

Amazon is also hoping to lure customers with a variable pricing strategy, selling songs for 89 cents to 99 cents, with more than half of its 2 million songs priced at 89 cents. The top 100 best-selling songs are 89 cents. Most albums are priced from $5.99 to $9.99, with the top 100 best-selling albums selling for $8.99 or less. The variable pricing goes against Apple’s strategy of setting one 99-cent-per-song price for all its tracks.

Amazon is not the first company to add a twist to its business model and tackle iTunes. Real Networks competes with its Rhapsody store and MTV had Urge—both of those services used a combination of subscriptions and downloads to try to take on Apple, but ultimately, the companies wound up combining their efforts. Another company, Virgin Group, announced in September that it plans to shut down its online store in the UK and the US this month.

At least one analyst Macworld spoke to sees a similar fate for Amazon’s new offering. “When you look at what Amazon did, they did not advance the concept of digital music, they created a ‘me too,’” said Tim Bajarin, president of high-tech consulting firm Creative Strategies. “Anyone that wants to topple Apple will have to create something more innovative than Apple—‘me too’ doesn’t cut it.”

Amazon has another large problem it has to contend with going up against Apple—complete support from the major record labels. While EMI and Universal are signed on, Sony BMG and Warner Bros. are not.

“Signing up two major labels is a coup for Amazon, but they still need the other labels,” said Ross Rubin, director of analysis at NPD Group. “Clearly that represents a huge range of artists not in the store. Their first priority is to work on getting those other labels.”

Then again, Amazon can point to its agreement with Universal as an edge over Apple. When the record label announced in August that it would test the sale of DRM-free music, it moved ahead with those plans without including iTunes. So far, only EMI offers DRM-free music at iTunes through the iTunes Plus service that launched in May.

A significant part of iTunes’ dominance in online music can be traced to its close ties with Apple’s popular iPod line. Services like Rhapsody and Urge couldn’t offer iPod-compatible music because of competing music formats and DRM requirements.

Amazon MP3 doesn’t face that hurdle. Because its tracks don’t have DRM restrictions, a user could download a song into an iTunes library and sync it with an iPod.

For this reason, NPD’s Rubin thinks Amazon has a chance to be competitive. “Up until now there’s really been few options in terms of online stores that sell music compatible with iPods,” said Rubin.

Even with the iPod compatibility, Creative Strategies Bajarin doesn’t think it will be enough for Amazon. “There is no question that while Amazon might have something competitive, they will not actually impact Apple’s business,” he said.

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