Thursday, February 16, 2006


Will Amazon's Move Change the Music Landscape?

What's Amazon trying to do in music? Create a platform like Microsoft's Play For Sure? I doubt it. It looks like Amazon can leverage many things.

One is its brand: Amazon-branded mp3 players may stand out in an otherwise crowded consumer electronic marketplace but will selling itw own-branded mp3 player limit its ability to sell other branded digital music players? Will Apple stop selling ipod through Amazon? is the risk worth it?

Two: it is clear that Amazon wants to leverage its customer base: sure, it has gone beyond books but what proporition of its customers buy more than one category? two categories? more than two categories? More important is that it is seeking a subscription-based revenue model to compete against Apple and Yahoo. Time will tell if the subscription model takes off and who wins in that space.

Three: Amazon's success will depend on its ability to strike deals with music labels. It appears that it is in discussions with the following: Vivendi Universal SA's Universal Music Group; Sony BMG, a joint venture of Sony Corp. and Bertelsmann AG; Warner Music Group Corp.; and EMI Group PLC. If it can garner critical music content, customers may take it seriously.

Amazon knows how to orchestrate the interplay between direct and indirect network effects in physical e-commerce. So, I will not bet against Amazon. will it succeed in the digital space? The critical signs will be the nature and scope of relationships with the music labels. Worth watching for.

Wall Street Journal's observations about Amazon's foray into digital music are worth reading.

Among the manufacturers Amazon has mentioned as likely partners for a subsidized hardware offering is Samsung Electronics Co., whose flair for stylish design is raising hopes among music executives that the initiative could create a strong alternative to iPod. A representative at Samsung's headquarters in Seoul, South Korea, couldn't be reached for comment.

Amazon would face the same challenges as other music-player makers: buying enough flash memory to store content on small music-player devices and securing music content, says Mr. Crotty of iSuppli. Apple has tried to lock up available flash memory for its smallest music devices.

Amazon has been busy building technology for digital downloads. Amazon says it has hired 3,000 people companywide, including many software-development engineers who presumably are working on digital content initiatives, over the past year. That is more than Google and Yahoo, which hired 2,659 and 2,185 people companywide, respectively, last year.

The digital-music plan is one of several initiatives Amazon has been exploring to offer its content and products in digital form. Most recently, the company announced it will begin broadcasting a weekly Internet show featuring comedian Bill Maher and guests from the worlds of books, music and film.

A couple of key ways Amazon hopes to set itself apart would involve a subscription service, in which users pay a flat monthly fee for access to an unlimited amount of music. Subscription services, like those by Napster Inc. and RealNetworks Inc. are typically more profitable for recorded-music companies than "a la carte" download stores like iTunes, which doesn't include a subscription option. However, their subscriber bases of 500,000 to 600,000 are tiny compared with Amazon's 55 million customer accounts.

Amazon has discussed offering subscribers digital-music players that come preloaded with tunes suggested by the online retailer, based on factors such as the subscriber's personal CD-buying history on the site. The preloaded music could be kept on the player as long as the customer pays the monthly fee, but could also be swapped out for other songs during the course of the subscription.

Another likely feature: the portable players would be free or very cheap with a long-term subscription -- say, a year -- similar to the way cellphone providers subsidize the cost of new handsets when customers commit to service agreements. It's possible Amazon would price the subscriptions close to what competitors typically charge -- about $15 a month -- and has said it may offer discounted CDs to subscribers.

Existing subscription services have been hampered in part by the fact that none of them are compatible with the market-dominating iPod, which sold 14 million units in the fourth quarter of last year. In a recent conference call with Wall Street analysts, Warner Music Chairman Edgar Bronfman Jr. said subscription services' "growth and popularity has been impacted by the lack of an outstanding device."

In general, competition is good for consumers. What's clear is that we are far from robust business models and stable competitive interactions in the music network.

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