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Amazon Takes Aim at Apple

Daniel Del'Re

Online retailer Amazon.com(AMZN Quote - Cramer on AMZN - Stock Picks) stepped up its attempt to challenge Apple's(AAPL Quote - Cramer on AAPL - Stock Picks) dominance in the music downloading market.

The company said on Thursday that its music downloading service, called Amazon MP3, will release tracks from Warner Music Group artists available without digital rights management software that prevents copying and sharing. This expands Amazon MP3's library to 2.9 million DRM-free songs at prices of 89 cents or 99 cents per download.

Amazon's expanded catalog elevates the company's stature as a player in the market for digital music. Analysts see the move as an attempt to remain a relevant music retailer as sales of compact discs grind to a halt that media trackers from the Yankee Group say could come as soon as 2012. But Amazon MP3, which debuted in September 2007, has arrived late to the game and will be hard pressed to dislodge Apple.

Premillennium movers like Napster scared recording labels into rallying behind the DRM-protected downloading service that Apple devised with its 2001 launch of iTunes and the iPod, and which catapulted the company to a commanding and unrivaled market share.

Apple now holds roughly 80% of the market for both online music downloads and sales of digital music players, and has sold over 100 million iPods and several billion songs from iTunes.

"I think Amazon is taking a step toward becoming more competitive, but it's only a baby step," says Michael Goodman, a Yankee Group analyst. "In order for somebody like Amazon to appeal to iPod users, they have to be significantly better than iTunes."

What's more, Apple hasn't stood still in the battle for DRM-free music. It now offers about 2 million songs without DRM software -- some for as little as 99 cents -- and allows users to remove DRM software from protected tracks by paying an extra 30 cents.

But Amazon's decision to move forward with a music service clearly signals that it will not readily concede the online music business to Apple, leaving many to wonder how it will mount a credible challenge.

The retailer's recent foray into device making with its Kindle electronic reading device suggests it may take the next step and develop its own music player. That would mimic the integrated nature of the iPod device and iTunes service, which analysts and investors have consistently said is Apple's primary competitive advantage.

But with iPod satisfaction rates running at over a staggering 90%, and competitors like Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks) failing to dent its market share, an Amazon-made device would likely struggle to dislodge Apple.

According to the Yankee Group's Goodman, Amazon investors should tone down any expectations of seeing the company topple Apple, and instead hope for it to become the best alternative to iTunes.

Even if Amazon MP3 were a loss leader, it may attract visits that result in sales of other products, including iPods. It remains to be seen, however, how successful the service will be on its own as well as in increasing the per-visit value of buyers.

An attainable short-term goal would be to reach the No. 1 spot among the iTunes competitors by the end of 2008, and then reassess the strategic merit of Amazon MP3, says Yankee Group's Goodman.

Amazon shares were recently trading up $1.25, or 1.35%, to $94.10, despite a selloff in stocks.

Apple shares were also rising, recently gaining $2.36, over 1%, to $201.31.