opens online music store

[26 September 2007]

By Eric Benderoff

Chicago Tribune (MCT)

CHICAGO - wants to put a bruise in Apple Inc.‘s digital music sales.

By opening its own online music store Tuesday and setting the price for many best sellers at 10 cents cheaper than at Apple’s iTunes, Amazon signaled it intends to challenge Apple’s dominant position.

Not too many companies are having luck these days going up directly against Apple, but Amazon is certainly a big enough player in Internet retailing to take a shot. It also has a marketing opportunity because the music it will sell is compatible with any MP3 device or music-playing mobile phone. Most music sold at the iTunes store only works with Apple’s iPods.

“They know how to sell music,” analyst David Card said of Amazon. “They are a serious player and could be a force in digital music.

But even though Amazon’s music can play on any MP3 player, Apple is not likely to be threatened, said Card, who follows the media for JupiterResearch, because any success related to digital music is likely to help Apple’s products, too.

Apple is “trying to sell the best media device on the market,” he said. “If this helps them sell more iPods, I think they will be OK with that. The margins of being a retailer are a lot thinner than the margins of selling” high-tech devices like iPods.

Apple’s shares rose $4.90 on Tuesday, to close at $153.18, four cents shy of it’s 52-week high.

Amazon shares rose 89 cents to close at $93.48.

At Amazon’s online store, called Amazon MP3, top hits are priced from 89 cents and top-selling albums start at $8.99, a dollar less than the standard price at Apple’s store. At iTunes, singles typically sell for 99 cents and most albums are priced from $9.99.

Pete Baltaxe, Amazon’s director of digital music, would not say Amazon is directly challenging iTunes, the nation’s third-largest music retailer even though it only sells digital files, but the marketing left little doubt: The artwork Amazon supplied to promote its service features the new album by Feist, whose catchy “1234” video is used in Apple’s national television advertising.

That track was the top-selling single at Amazon’s store on Tuesday, selling for 88 cents. On iTunes, it was the No. 2 single, selling for 99 cents.

But despite price, Amazon wants to make it clear that digital music bought at its store will work on any player, no matter who makes it. The songs do not include copy protection, known as digital rights management software. Most of the songs Apple sells on iTunes have DRM restrictions that limit those songs to playing only on iPods.

“There is an opportunity to provide our customers with an offering that has more selection, the most interoperable experience and great prices,” said Baltaxe. Amazon, which has 69 million active customers, is the No. 4 retailer of music in the nation, according to research firm NPD Group. Now that it will also be selling digital music files as well new and used CDs, it could vault past Apple. The top 5 are Wal-Mart, Best Buy, Apple, Amazon, Target.

Amazon is launching its store with 2.3 million songs available for purchase, Baltaxe said. But while those songs can be played on any MP3 player or music-enabled mobile phone, it doesn’t include music from two of the world’s biggest record labels, Sony BMG Music Entertainment and Warner Music Group, which have not agreed to sell music files without copy protections.

The store is launching with unprotected files from major labels EMI Group and Universal Music Group as well as about 20,000 independent labels, Baltaxe said. Several of those independent labels, including Alligator Records, HighTone Records and Rounder Records, will be selling unprotected files for the first time.

By comparison, Apple offers more than 6 million song files and has sold more than 3 billion songs through its iTunes store since it launched in 2003. But Card points out that Apple runs the iTunes store mainly to sell iPods.

“The iTunes store makes the iPod a better device,” he said. “And more stores (that work with the iPod) will make it an even better device. The iPod wins.”

Apple declined comment for this story.

Amazon sells a lot of iPods (the top 14 best-selling MP3 players on Tuesday were flavors of the iPod) but it also sells a host of other MP3 players, ranging from Microsoft’s Zune to the Sandisk Sansa line.

Card said it’s likely that as the holidays approach, Amazon and at least one MP3 maker would likely offer some sort of promotion tied to the new download service. “It would be a smart thing for a retailer who sells a broad variety of MP3 players to do,” he said.

Baltaxe said the retailer is currently not running any such promotions and he would not discuss future sales plans.

“We’re focused on the music offerings right now,” he said.

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