Let the MP3 Price Wars Begin

In a few short years, Apple and iTunes could be locked into the kind of deep-discounting that Tower Records and CD Wherehouse were engaged in during the years before digital downloads swept both aside. That's going to help rejuvenate volume sales of songs and albums -- and bring their prices down to earth.

But over time, it's also going to ratchet down the margins of music stores like Amazon and Apple. In announcing its new music store, Amazon didn't say how the discounts would eat into its margins, but you can bet analysts will be grilling Bezos on this in next month's earnings call.

Aside from price cuts, one factor can help determine which company will emerge as the market leader -- I'd call it the filtering factor. It's not enough to simply throw all your songs onto a site and expect users to find them, you need to have reviews and recommendations to help them out. This is Amazon's Achilles' heel right now, and the company may go hunting for a Last.fm-like start-up to help it out. Apple may also be on the hunt.

One beneficiary of the new DRM-free era could be eMusic, a niche player that has shunned top 40 artists to focus on more obscure titles. eMusic has long sold DRM-free songs from smaller labels for as low as 25 cents each. It also has a robust community of users who help create a strong filtering service.

Apple and Amazon could snap up eMusic, learning from the company's years of knowledge in successfully retailing DRM-free music. They could also use the 25-cent price point as leverage to pressure the bigger labels into lowering their own prices. With DRM on its deathbed, I doubt any company understands better how to sell digital music right now than eMusic.

Amazon and Apple are part of Jim Cramer's Fantasy Football Stock Picks. Amazon is among Cramer's Running Back Stocks, and Apple is among his Cramer's Wide-Receiver Plays.

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