"Watch your back, Mr. Mac," fellow Fool Tim Beyers warned last month, when Billboard magazine unearthed a promotional deal through which PepsiCo (NYSE: PEP) would be giving away 1 billion MP3 downloads through Amazon.com (Nasdaq: AMZN).
Well, the news became official last night. On the eve of Apple's (Nasdaq: AAPL) Macworld Convention and Expo, Amazon and Pepsi are out to steal Apple's thunder before Steve Jobs steals it right back.
The Pepsi Stuff promotion kicks off next month; during this promotion, buyers of Pepsi products will be able to redeem unique codes online. The deal has changed a bit since last month's leak. Instead of 1 billion MP3 downloads, soda sippers will be able to apply the points to other Amazon.com offerings, like Unbox digital video downloads, CDs, DVDs, and clothes. In other words, even though a fraction of the "up to $1 billion in prizes" will ever be claimed, an even smaller fraction will go for free Amazon downloads.
This doesn't mean that Apple can breathe easy. Video downloads are another punch in the gut for Apple. One can argue that some of those points will go toward Apple product purchases, but it's going to be an interesting few months on the iTunes front as Apple's store competes against a glut of freebies on Amazon.com.
Apple and Pepsi pulled off a similar stunt on a smaller scale four years ago. It was a different climate then. Apple was really only competing against itself when it came to digital downloads. The major labels were sobering up after their own failed endeavors, and Apple was seen as a lifeline from the sea of peer-to-peer piracy sites.
Obviously, kids are still downloading songs illegally for free, but now several retailing heavies like Amazon and Wal-Mart (NYSE: WMT) are selling songs online. However, it seems none of them can compete with the slick iTunes interface and the sticky base of iPod users, even with lower prices, unshackled MP3 files, and higher bit-rate qualities.
But even though it's hard to compete on price you'll still find willing takers when you're giving something away. Since Amazon's MP3 files are compatible with everything -- iTunes included -- they become a feasible alternative for a penny-pinching teen who was going to buy the same song on iTunes.
This brings us to the power of giving something away as a strategy for motivating future sales. I go to warehouse clubs like Costco (Nasdaq: COST) and BJ's (NYSE: BJ) on an empty stomach because I know there will be free samples of food. At a mall food court, I consider myself a professional toothpick collector. I think I'm the one getting the deal, but when the freebie sample finds its way into a purchase product (in my shopping cart or in my tray), I've given the product the last laugh.
A lot of soda drinkers will be giving Amazon's storefront a free taste test later this year. What if they like the ability to port an MP3 anywhere? What if they like the sonic quality of Amazon's product better?
You would be an idiot to predict that Amazon can take down Apple with a box of toothpicks, but it will introduce many iPod users to the open world of legal alternatives.
Subscription services like Napster (Nasdaq: NAPS) have been offering free trials for years. I know that. However, it's hard to sell $2.00 gallons of gasoline when a rival operator -- even if it's in a remote location in a less attractive store -- is giving it away.
Apple will need to remain competitive over the next few quarters by promoting its own library of DRM-free tunes, beefing up its own freebies, and making enough noise until the Pepsi-Amazon spigot is shut tight.
Watch your back, Mr. Mac? Forget your back. Look in front of you. They're coming right at you.
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