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How Do You Like Those Apples, Sam?

Over the years, Wal-Mart (NYSE: WMT  ) has zigged and zagged down the road at frenetic speeds and lapped the slowpokes with ease. The discount department-store chain is the country's leading seller in toys, DVDs, groceries, and even firearms, but it wasn't always that way. It just happened to eventually pass the competition by, and it never looked back.

So I guess it must have had to rub its eyes this week when it saw Apple (Nasdaq: AAPL  ) in the rearview mirror, flicking its headlights to have Wal-Mart move out of the way. You see, when it comes to music, Apple has now done the unthinkable: It has passed Wal-Mart.


Top 5 Retailers in January and February


Apple iTunes




Best Buy (NYSE: BBY  )

4 (tie) (Nasdaq: AMZN  )

4 (tie)

Target (NYSE: TGT  )

Source: NPD Group.

Some may argue the finer points of the data. Apple's sales are mostly on individual tracks, but NPD equates the sale of a dozen single tracks to an actual CD. Still, this is yet another sign that digital music is gradually offsetting the precipitous drops in physical CD sales.

Hooray! You're going digital
If you're a record label, this is welcome news. Would you rather have to press and package a disc, have a distributor ship it out to Wal-Mart, and brace yourself for eventual cutout returns when a CD's popularity fades? Or would you like to passively collect hefty royalties from inventory-free digital-music sales, while Apple foots the bill for storage and bandwidth?

The answer is such a no-brainer that Wal-Mart, Best Buy, and Amazon have all followed Apple in offering digital downloads from their own websites.

The challenge, of course, is to keep making as much money as before. Margins are higher in digital distribution, but the actual volume hasn't been enough to compensate for the decline in CD sales.

Different players have different hurdles to clear. For the record labels, it's the fear that an increasing number of artists will simply bypass the labels and distribute directly to the consumer -- after all, the quality of home recording and mastering capabilities has improved dramatically while costs have plummeted. Meanwhile, everybody who's concerned about piracy will nervously watch the consumer's continued preference for unshackled MP3s over digitally protected platforms.

For retailers, the rub will be differentiation. Once everyone is selling essentially the same thing at the same prices, who has the advantage? Wal-Mart clawed its way to the top over conventional record shops because it expanded aggressively and had the economies of scale to offer CDs at attractive price points. Best Buy bypassed the record stores by using music as a loss leader -- it was willing to take a hit on $10 CDs if it meant getting more people into the stores to buy higher-margin wares. Now, how will these chains stand out in a very level cyberspace?

It's in the mix
We all know how Apple stands out. It owns the leading portable music player, which syncs up with the popular iTunes player, which is backed by the iTunes Music Store. It's a perfect ecosystem that even Microsoft (Nasdaq: MSFT  ) has fallen flat in trying to emulate.

By the end of the year, Apple also expects to have 10 million iPhone users. Once again, the moment you plug your iPhone into your computer, it warms up to iTunes and the e-tail charms of the iTunes Music Store.

Apple sells video downloads, too, but Wal-Mart is probably safe on that front for now. Video files are substantially larger than music files, and the quality Apple can offer still isn't comparable to DVD and now high-def Blu-ray. It will take time for viewing appliances, broadband speeds, and lower storage costs to catch up there.

That doesn't mean Apple can't gloat about its music superiority. With no iPod killer in sight, the chance that other companies will ask Apple to clear the road so they can zoom by are highly unlikely in the near term.

Drive on, Apple. Just make sure you have the seatbelt buckled.

A few more Apple dippers for you:

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