Amazon.com Cranks Up the Music

Competing against Apple's (Nasdaq: AAPL  ) iTunes Store is a song typically played in minor keys, but that won't stop Stock Advisor pick Amazon.com (Nasdaq: AMZN  ) from making a major push to unseat the digital-music champ next month.

Sources have told the New York Post that the country's leading online retailer will launch its eagerly anticipated MP3 store in three weeks. The store itself isn't a surprise. Amazon officially announced the virtual storefront last May, capping off months of speculation.

The key here is that Amazon will be selling songs in the MP3 format, free of digital rights management (DRM) safeguards that restrict the portability and functionality of most commercially available downloads. In other words, Amazon's downloads won't have CD-burning restrictions or be shackled to a particular portable media player.

It sounds good, but we can't tap Amazon as a pioneering visionary here. Apple is already on the DRM-free bandwagon, striking a premium deal with EMI earlier this year to sell unprotected tracks. Other early arrivals include Wal-Mart (NYSE: WMT  ) and gbox.

The Amazonian difference
Amazon is an important player, though, because of its established presence in e-tail. It rang up $10.7 billion in net sales last year. It's a brand that everyone knows, and a leader in moving music CDs through a Web-based platform.

It should be a breeze to push bonus digital tracks as a gateway drug to existing customers. Offering CD-shoppers instant gratification by suggesting digitally-delivered alternatives adjacent to its CD listings is a no-brainer. Customers will think it's convenient, while Amazon will spare itself the inventory and physical fulfillment hassles.

Record labels will probably relish the possibilities. Imagine tacking on a free digital track of a music company's emerging artist when a consumer buys an entire CD from a similar, yet established, act.

OK, so every major label isn't on board with the MP3 movement. Amazon's store will open with roughly a million tunes from EMI, Universal, and countless indie labels, but behemoths like Sony (NYSE: SNE  ) and Warner Music (NYSE: WMG  ) are still wary of the digital freedom as they clutch their DRM crutches.

Those crutches look flimsy, though. Once consumers embrace the unchained MP3 format, it'll cost Sony and Warner in digital-music sales if they don't match their rivals. It's easy to see why they're worried. A teen can buy an MP3 track, and it won't be long before it's shared on a friend's cell phone or a parent's satellite-radio portable receiver. However, this is already happening through illegal file-trading networks. Adopting MP3 as the new format of choice is the industry's way of finally matching what consumers already swap freely.   

Tearing down the walls
Wider availability of MP3 tracks may hurt Apple's market dominance. I know that you might disagree with me, but I think the proliferation of seasoned online peddlers like Wal-Mart, RealNetworks (Nasdaq: RNWK  ) , and Amazon into the MP3 market will take a bite out of the mighty Apple.

Once MP3 becomes the platform of choice, price becomes a key driver. Wal-Mart is pricing its tracks at no more than $0.94 a share, well below the $0.99 price point for DRM-protected Apple tracks, or the $1.29 iTunes charges for premium un-DRM'ed downloads. Amazon's proposed price points, as low as $0.89 a track for catalog titles, will also test the resolve of Apple's pricing.

So what? Apple's real money is made through iPod sales, not iTunes distribution, right? Yes, but have you ever broken an iPod? You either repaired it or bought another iPod. Even though generic digital media players are plentiful and cheaper, you stuck with the next generation of iPod, because you had a chunky library of iTunes tracks that couldn't be ported to a non-iPod player without going through the burdensome CD-burning and digital-relabeling process.

I'm not dumb. The iPod's design and intuitive features will still find people favoring Apple's player over the competition, but it'll be a more level playing field once digital music is truly portable across all platforms. Heck, this may even mean a huge traffic windfall for CNET's (Nasdaq: CNET  ) somewhat neglected MP3.com.

Amazon isn't firing the first shot -- just the loudest. It bears listening to, at worst, or counter-attacking, at best.

Chart Amazon's path to MP3-ness:

Wal-Mart is an active stock pick for Inside Value newsletter subscribers. Amazon.com has been recommended to Stock Advisor subscribers. CNET Networks is a Rule Breakers stock pick. No matter how you like your music, a free 30-day trial subscription is yours for the taking through any of the newsletter services.   

Longtime Fool contributor Rick Munarriz has fond memories of the old MP3.com, before CNET bought the domain. He does not own shares in any of the companies in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy misses the Walkman.


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