You don't hear a lot about's (Nasdaq: AMZN) digital music downloading service, so I was surprised with Tuesday's NPD Group report indicating that the e-tail giant had surpassed Wal-Mart (NYSE: WMT) to become the country's second biggest seller of music files, when comparing domestically downloaded individual tracks.

Don't worry, Apple (Nasdaq: AAPL) fans. Amazon is selling just a tenth of the tracks that the iTunes Music Store dishes out. There may come a day when Apple has to worry about the competition, but that day is still several quarters away.

The even more intriguing stat in the NPD report is that just 10% of those who have bought MP3s from Amazon's nascent storefront were previous iTunes customers. In other words, iPod users aren't the ones flocking to Amazon, even though Amazon is selling high-quality MP3 files for less than Apple offers unrestricted MP3s.

This should tell you a few things:

  • Apple's iTunes customers are a pretty loyal bunch.
  • The only real threat to iTunes is a slowdown in iPod and iPhone sales.
  • Apple doesn't have to compete on price, even in a level playing field with a commoditized product.

You should still tip your hat to Amazon, though. It is succeeding where dot-com rock stars such as Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT) -- two companies that know how to draw traffic -- have failed. That's a credit to Amazon's ability to master e-tail. Its success is a result of understanding online shoppers and of recognizing the importance of making the digital migration. It's offering all of its key media categories -- books, music, and movies -- in digital form. No one knows when we'll kiss physical media goodbye, but Amazon is making sure that it's ready when the time comes.

Although Apple isn't yet nervously eyeing its rearview mirror, Amazon will prove to be a smarter competitor than anyone else Apple has faced yet. Even if it takes a year or two before things gets interesting, you won't want to miss the race.

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