iTunes New Challenge Comes from Amazon

No DRM restraints and slightly cheaper music stand to make Amazon's MP3 Store the first serious competitor to iTunes' dominance. this week launched its new Amazon MP3 Store, which, some analysts say, may become the first serious digital music challenger to Apples dominant iTunes Music Store.

Like the iTMS, Amazons online store offers digital music tracks and albums from major-label artists. However, all tracks offered by Amazon are free of DRM (Digital Rights Management) constraints, unlike the majority on iTMS. All $0.99 tracks on iTMS are encoded with Apples FairPlay, which restricts the number of computers on which the music can be copied. Though some iTunes Plus downloads on iTMS are DRM-free and encoded at a 256K bps rate, these are priced at $1.29, whereas all tracks on Amazons store are also 256K bps and come at a lower cost: $0.89 or $0.99.

Currently, the Amazon store features approximately two million songs, far fewer than iTMS approximately six million. Amazon has made the DRM-free deal with only Universal and EMI, two of the four major record labels; DRM-free songs from EMI are also available as iTunes Plus versions, though at the higher cost.

But Universal recently pulled out of iTMS, leaving its products available, in DRM-free format, only at Amazon.

In addition, Amazons products are in the open MP3 format, which makes them playable not only on Apples iPods but also on a wide variety of digital music players—even Microsofts slow-selling "iPod killer," Zune.

This is in stark contrast to many other attempts at online digital music stores, such as Wal-Marts endeavor, which sell only DRM-encrypted files that play only in Microsofts Windows Media Player. In fact, Wal-Marts digital music site is accessible only on Windows-based PCs.

The combination of platform agnosticism and the lack of DRM, said analysts, position Amazon favorably—if not immediately, then in the near future.


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"In this market—as in everything—timing is the key," said James McQuivey, an analyst at Forrester Research.

"Amazon announces its intention to build an MP3 store in roughly the same time frame that Apple announces it had already sold one billion tracks of music, the same amount it took all of 2006 to sell. That led major labels to swallow hard and look at Amazon as their one great hope for creating an iTunes competitor—something they desperately need in order to keep Apple from dictating how digital music will be sold for years to come. I predict the rest of the majors will join no later than early 2008 once Amazon can show just how successful the 2007 holiday season was."

He added, "for Amazon, everything depends on DRM-free music because Amazons target customer is the MP3 buyer on its own site, most of them buying iPods which wont play other DRM formats. So Amazon cant hope to make this work without removing DRM."

"As to why the labels went for it," he said, "everyone wants to encourage a competitor to iTunes, even if it means risking a DRM-free trial."

Sam Bhavnani, a research director at Current Analysis West, agreed as to the Amazon stores potential.

"Amazon today is not a viable competitor to iTunes. It may be [a competitor] in the future, but it is going to take it a minimum of 12 months to gain some momentum," he said.

"The vast majority of people are not looking for an alternative to Apple today. They love the hardware piece, they love the software piece, they love the integration of the two," he said.

But, he said, "the record companies are finally waking up to the fact that people dont want to buy handicapped music, which is why you are seeing more and more announcements around DRM-free. By definition, DRM is heinous and unpopular. Apples DRM is really no better or no worse than others—there are always drawbacks. People are increasingly noticing DRM as people are increasingly using multiple computers [work laptop, home laptop, wifes laptop, kids laptop], so DRM-free music is clearly the way to go," he said.

At the end of May, Apple introduced iTunes Plus, which offered higher-quality (256K bps, AAC-encoded) files without any DRM, including Apples own FairPlay, limited to artists on the EMI record label. Each song came at a slight premium: $1.29 rather than $0.99. Owners of previous versions of songs and albums could upgrade their content to iTunes Plus at a cost of $0.30 per song and $3.00 for "most albums," according to Apple.

In February, Apple published on its Web site an open letter entitled "Thoughts on Music" and written by Steve Jobs. In it, Jobs reminded readers that iTunes and iPods can store and play any music ripped from a CD, DRM-free.

But more to his point was that the inclusion of DRM at all was a requirement from the "big four" music labels of Universal, EMI, Sony BMG and Warner.

But, Jobs argued, the future might lie in the companies releasing this demand.

"Imagine a world where every online store sells DRM-free music encoded in open, licensable formats," he wrote. "In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store. Every iPod ever made will play this DRM-free music."

He added, "Why would the big four music companies agree to let Apple and others distribute their music without using DRM systems to protect it? The simplest answer is because DRMs havent worked, and may never work, to halt music piracy."


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