Watch Your Back, Apple

Three billion song downloads later, someone is finally ready to take on the market dominance of Apple's (Nasdaq: AAPL  ) iTunes. Motley Fool Inside Value recommendation Wal-Mart (NYSE: WMT  ) is launching an online music store that will undercut iTunes prices. That isn't new. Several competitors have priced their offerings below the $0.99 per track, $9.99 per album that Apple harvests.

However, Wal-Mart is also stripping away the pesky DRM (digital rights management) restrictions that limit the functionality and portability of purchased tracks. In other words, these are genuine MP3 files that can play on any digital music player -- including iPods -- as well as be burned to CDs without limitations.

The cynic would argue that we have now evolved to the point where you can buy the superior product that has been available for free through illegal file-sharing networks for years. However, let's give Wal-Mart some credit here. Pricing tracks at $0.94 apiece and full digital CDs at $9.22, it suddenly makes the iTunes Music Store a little less compelling.

Wal-Mart is not the first to announce its DRM-free intentions. Amazon.com (Nasdaq: AMZN  ) made a similar announcement three months ago, but where is the store? Walmart.com has the MP3s available as of this morning.

Not to be outdone, Apple announced a deal with EMI back in April to provide DRM-free tracks. They would be higher-quality files, but there would be a $0.30 premium per song.

So what's the catch? Well, just a few of the music studios -- like EMI -- are willing to release their artists on the MP3 format. Wal-Mart will continue to sell tracks in the restrictive Windows media audio (WMA) format, since it has wide record-label support. However, WMA has been a hard sell for companies like Wal-Mart. Sure, the files play on your Creative and SanDisk (Nasdaq: SNDK  ) players, but they don't work on iPods or even with Zunes.

I'll save you a trip to the crystal ball and tell you exactly how this plays out. Consumers aren't stupid. They may be fanatical about their favorite bands, but EMI artists are going to start sounding a whole lot better now that fans don't have to buy a physical CD or resort to a pirated download to make their own MP3 files. Over the next few quarters, you will see EMI grow its digital music presence at a healthier clip than the market. The other labels will have little choice but to follow suit.

It'll happen. You just have to wait for it. It may not seem likely. Warner Music Group (NYSE: WMG  ) sent a notice of termination back in April when AnywhereCD -- a company started by former MP3.com founder Michael Robertson -- began selling Warner tracks in its unprotected music locker format. However, no label can afford to cling to the handcuffed DRM format once rivals are making a commercial mark without it.

So, sure: Watch out, Apple. But let this be a bigger wake-up call to the major labels that may have overslept as the digital music revolution passed them by.  

Fast-forward to this Foolishness:

Digital music is a high-growth industry that is often explored as part of the Fool's Rule Breakers newsletter service. Amazon.com is a Motley Fool Stock Advisor pick. Wal-Mart is an Inside Value recommendation. Turn up the investing music for free with a 30-day trial subscription to any of our newsletters.

Longtime Fool contributor Rick Munarriz isn't a subscriber to any digital music service, even though he does have satellite radio. 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 has a disclosure policy, and it will play on any MP3 player.


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