Will Amazon Filch a Slice of Apple's Pie or Simply Bake Its Own?

Amazon is the largest online retailer of album CD sales and has been for years. So why the late entry to digital delivery? The company surely has had the money and technical experience to launch such a store -- why wait until this fall to start sales?

"Amazon.com has a huge customer base, huge traffic and they've got a sterling reputation for providing customer satisfaction, and I think that's one of the reasons why they waited," Phil Leigh, an analyst for Inside Digital Media, told MacNewsWorld. "They did not want to sell DRM music that was going to create some bad customer experiences."

The biggest question surrounding Amazon.com's foray into digital music sales is its potential impact on the market-dominating Apple iTunes music store.

Will iTunes Lose Market Share?

"The great thing about this deal for Amazon is that Amazon already has a customer list of people who have bought iPods from them. They can start marketing to them right away, not to mention every future iPod buyer on Amazon.com," James McQuivey, an analyst and vice president for Forrester Research, told MacNewsWorld.

"That cross-sell opportunity is the advantage that Amazon has -- they are selling devices and CDs, and now will add digital downloads. Any one of those purchases is a potential cross-sell opportunity for Amazon, and that's a much bigger base to sell to than the iTunes user base," McQuivey explained. "As long as the music is free of DRM, Amazon can start pushing any device with the confidence that all of its digital music is compatible."

While Amazon.com will almost certainly gain market share simply by entering the space -- and therefore causing iTunes to potentially lose market share -- Amazon.com may also be able to increase the entire size of the digital music market.

"I think one of the things that's motivating even Apple to encourage it [DRM-free music] is that the growth rate of the sale of legitimate digital downloads has slowed, and it shouldn't be slowing at this stage of the industry's life cycle," Leigh said. "And the reason is DRM -- at least that's one of the reasons. Other reasons might be piracy and peer-to-peer networks, but it appears that DRM is one of the main factors, and it's something that the labels can do something about."

It's entirely possible, Leigh noted, that Apple could sell even more music on its iTunes store, because Amazon.com's DRM-free focus may help spur industry-wide sales.

Labels on the Lookout

Major record label EMI recently took the first step toward a restrictions-free digital music world when it said it would allow the sale of music without DRM from its artists. Many independent and small labels already sell DRM-free music, however EMI represents some big-name artists such as Coldplay, the Rolling Stones and David Bowie. The wild card is whether other major record labels will follow EMI's lead and offer DRM-free music.

Later this month, iTunes will offer EMI's songs DRM-free at a cost of US$1.29 each -- $0.30 more than its usual $.99 song rate -- but the pricier tunes will download at a higher level of sound quality, too.

Amazon's announcement now -- and subsequent time lag until launching this fall -- may also give them time to woo other major record labels, Leigh said.

"They want to get more wood behind the arrow," he asserted, noting that Amazon wants to make sure that its customers have every opportunity to find the artists they are looking for in digital format.