Apple Puts the Thumbscrews On Amazon

Digital music stores may cure many old ills of the music business, like paying for unwanted filler tracks and needless CD manufacturing costs. But they sure don't stop the gamesmanship of the music business -- the shenanigans just move from music stores and radio DJs to websites and corporate boardrooms.

The latest example comes from Apple (Nasdaq: AAPL  ) , whose iTunes music store has left traditional retailers like Wal-Mart Stores (NYSE: WMT  ) and Target (NYSE: TGT  ) far behind to become the largest music store in the world. The only serious online rival to iTunes' dominance is Amazon.com (Nasdaq: AMZN  ) . iTunes holds a commanding 69% share of the digital music market, and Amazon's MP3 store is No. 2 with a bullet at 8%.

But Apple is taking exception to Amazon's marketing tactics and firing back by pulling some well-connected strings. Amazon's "Daily Deal" feature sometimes puts new music on the market the day before everyone else gets to sell it, including iTunes. Starting with Mariah Carey's album Memoirs of an Imperfect Angel and continuing through Vampire Weekend's Contra, the Daily Deal jump-start advantage appears to have the power to move Billboard charts -- and make a real difference to the sales of the albums it features.

Apple would call Amazon's advantage a false start, though. iTunes has threatened to reduce its marketing support for products that participate in the Amazon deal, according to a Billboard article. And that backroom play seems to be working the way Apple intended: Several big-name acts and some entire record labels have recently withdrawn from the Daily Deal.

"iTunes is getting frustrated because they work hard to set up and promote a release weeks in advance of the street date, and then lo and behold, Amazon jumps in there with this deal of the day and scrapes off some of the cream," an unnamed record label executive told Billboard. Indeed, the market maneuvering cuts both ways; there isn't a clear-cut "wrong" and "right" here.

But what is clear is that Apple is taking Amazon seriously in a way it never did with subscription services like Yahoo! (Nasdaq: YHOO  ) Music or Rhapsody from RealNetworks (Nasdaq: RNWK  ) . Music sales is still just a little side business for Amazon, but it’s a major revenue generator for Apple. If Apple allowed Amazon to grab every advantage it could without fighting back, the iTunes monopoly could very quickly turn into a duopoly with two major music providers.

Steve Jobs ain't gonna let that happen any more than he'd let HTC get away with copying the iPhone feature for feature or let the Palm (Nasdaq: PALM  ) Pre tap into your iTunes library through unauthorized and unlicensed channels. Amazon will have to fight hard for every little slice of the digital music market, and there is no free lunch.

Is Amazon playing fair? How about Apple? I think both players are acting well within their rights, but feel free to discuss in the comment box below.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Wal-Mart Stores is a Motley Fool Inside Value choice. Apple and Amazon.com are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On March 04, 2010, at 3:42 PM, marv08 wrote:

    Well, "music related products and services" (this excludes iPod/iPhone devices) account for roughly 1/15th of Apple's revenue and this still contains more than just music sales - if that is a major revenue generator for them, depends on the definition. Most people still consider the iTunes store mainly an incentive to buy Apple's hardware, which is - without any doubt - their main revenue generator.

    I do not agree with your definition of a monopoly. Apple only accounts for approx. 25% of music sales in the US and far less elsewhere. There is plenty competition, and as the specials Amazon is getting do prove: Apple has no power to get something the competition has no access to. So, not a single definition of a monopoly is fulfilled here. And even if this would be the case... a monopoly is nothing illegal.

    I consider the claims about these specials and early releases only a proxy issue. There are more severe issues. The MI tricked Apple into tiered pricing for single tracks and, all of a sudden, thousands of (single track) titles on iTunes are 30% more expensive than the same titles on Amazon. The MI is actually giving Amazon a huge advantage and iTunes' customers a bold one-finger gesture here. Just to be clear: I do not blame Amazon at all. It is the MI that is playing power games here. I am not surprised that Apple is reacting.

  • Report this Comment On March 04, 2010, at 4:59 PM, demodave wrote:

    If first place is 69% and second place is 8%, how the hell did second place earn a bullet?

    It does seem kinda hinky that Amazon is getting to scoop the advanced sales, if Apple is indeed putting in weeks of advanced work to get the Tuesday releases, but I'm sure not privy to the business deals that go on to make all this stuff happen. Seems kinda like a big what-ever to me....

    It's also sad to see that so much business growth is being reduced to little more than litigation.

  • Report this Comment On March 04, 2010, at 7:40 PM, TheDumbMoney wrote:

    I think Apple is less than five years away from a major antitrust case brought by the federal government based on its iTunes service/model if it keeps this kind of stuff up. Let's see.... It has a 70% market share. Nearest competitor has 8%. It pressures possible suppliers of this competitor to remove an advantage that competitor has. Exactly HOW is this ultimately different from MSFT strong-arming the PC-maker consumers of its hugely dominant operating system, back in the day, into excluding Netscape....?....? I don't know the law, but it seems very fishy to me. The important thing to realize is that Amazon and Apple are not equals here.

  • Report this Comment On March 05, 2010, at 1:56 AM, milleniumfalcon wrote:

    Apple is not, in any way shape or form, a monopoly when it comes to buying music. They have 70% of the market share for digital downloadable music. You can still walk into Target or Best Buy and buy a cd. You can buy vinyl for a lot of items - still. You can buy used music on Half.com. You can buy via Amazon. A monopoly is when the customer has no choice but to go to one dealer to get a product, an the dealer can therefore abuse the customer. This is not the case with iTunes.

  • Report this Comment On March 05, 2010, at 2:56 PM, jstevens111 wrote:

    That would be a major blow to Amazon if they somehow lose their ability to have these Daily Deals. I know so many people, including myself, that mainly just buy these deals and thats it. I've put together quite a collection from these deals. The prices are awesome, especially compared it iTune. There's a cool google gadget for tacking and listening to the daily deal -

    http://www.google.com/ig/adde?moduleurl=http://www.frugalgad...

    or if you don't use google gagets, -

    http://www.frugalgadgets.com/amazon-mp3-daily-deal.php

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