Amazon Takes a Bite

If Apple Computer (Nasdaq: AAPL  ) is going to remain at the top of the digital music scene, it may have to vanquish one of the companies that helped get it there. (Nasdaq: AMZN  ) , the Internet's largest retailer -- and a mover of more than a few iPods over the years -- is supposedly gearing up to enter the scene as a provider of both digital media players and music content.

According to yesterday's Wall Street Journal, Amazon will be rolling out a self-branded media player, along with a music subscription service similar to Napster (Nasdaq: NAPS  ) or RealNetworks' (Nasdaq: RNWK  ) Rhapsody.

The need for digitally delivered speed
This isn't just Amazon being greedy. The popular Stock Advisor recommendation is doing so for survival's sake. More than two-thirds of the retailer's sales are generated from light media products such as books, CDs, and DVDs. With digital delivery on all three fronts inching closer to reality with every dreamy blink, Amazon wasn't about to sit idly by as consumers tire of physical product.

In November, Amazon announced Amazon Pages, a service that will allow shoppers to buy digital copies of book pages, chapters or entire reads. It hasn't started selling video downloads yet, but it's already educating the marketplace with a variety of free streamed offerings.

Completing Amazon's three-legged stool of digital delivery, the buzz of an online music service has been building since last summer, when Amazon was hitting the classifieds to land digital music-savvy hires. Rumors began to surface that Amazon was also negotiating with the four major record labels.

Slowly, yet oh so methodically, Amazon was dipping its feet into a future free of UPS knocking at your door. The company was placing virtual checkpoints all around the moat.

Between a digital rock and a hardware place
The twist here -- and, trust me, you'll think it's brilliant the more you think about it -- is that rather than launching this service as a player-agnostic software-based offering, Amazon is now apparently going to be pushing its own player too. Playing the hardware angle will help Amazon in a few ways. It can subsidize long-term subscriptions by taking a hit on the hardware, much the way cell phone, satellite TV, and broadband providers do. Audible (Nasdaq: ADBL  ) does this now, without owning the hardware carrot, by offering iPod shuffles to subscribers of its digital audiobook service.

According to the Journal, with hardware control on its side, Amazon will be in a better position to add value to the product by preloading it with content based on subscriber music-buying habits on the Amazon site. That's important. Amazon isn't just in the pocketbooks of its 55 million past customers. It's also in their minds with their celebrated recommendation software.

Amazon is also likely to cash in on other competitive advantages in order to stand out in the crowd. It can provide discounts on CD purchases. It mans the register. It presents music fans with a wide range of customer reviews that its competitors don't. Because it is a major client of the four major labels, it may even be able to secure proprietary content to truly seal the deal.

This will all make Amazon a worthy competitor on paper, but still a distant one in reality. Apple shareholders don't need to break out in a sweat ... for now. After moving more than 42 million iPods -- 14 million this past quarter alone -- no one is going to topple Apple in the near term.

Then again, up until now iTunes Music Store rivals have come from strictly standalone services. Yahoo! (Nasdaq: YHOO  ) , Napster, and RealNetworks just want to hook you with their all-you-can-eat music subscription models. Inside Value pick Microsoft (Nasdaq: MSFT  ) is starting to take digital music seriously -- on the software and hardware side -- but it doesn't pack the legitimate double threat that Amazon brings to the table. Apple? It doesn't need to fear Amazon, but it sure as heck better learn to respect what it represents.

Apple bites back
Apple will eventually need to muster a response. That may mean launching a music subscription service of its own, and earlier than it would have liked. It may mean playing hardball with Amazon as retailing partners become digital foes. That would be a shame, because according to Amazon, iPods were among the company's top three sellers during the holidays.

Amazon has been a Stock Advisor recommendation for going on three years now. Right now you are seeing why David Gardner also championed in the1990s as a great growth stock. CEO Jeff Bezos gets it. You don't attack Apple from the front. You try to sneak up on it from all sides.

But Steve Jobs is no dummy. You're going to be in for a treat if this battle does break out. It will be that rare chance to see two great minds duke it out on the business stage. Books will be written. Case studies will be dictated. Lucky you, you get to live through it.

Amazon knows what's at stake. It helped usher in the online retail revolution. Now it has plans to be more than a foot soldier in the digital media revolution.

Note: Speaking of your great timing, today is the third Friday of the month. That means the brand new issue of Stock Advisor is coming out. Yes, you can tap into the next great pick from Tom Gardner and his brother David. Don't squander the chance. Lucky you, there's even a free trial subscription available to hook you up with the newsletter for the next four weeks.

Longtime Fool contributor Rick Munarriz has traveled digitally before. The jetlag can get pretty fierce. He does not own stock in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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