Amazon Likes Digital Music

It wants to take on Apple.

Author:: Jonathan Berr
Publish date:: Feb 16, 2006 10:43 AM EST

Amazon.com

(AMZN) - Get Report

, already fighting

Wal-Mart

(WMT) - Get Report

for online customers, now wants to do battle with

Apple

The largest Internet retailer is in advanced talks with

Vivendi Universal's

(V) - Get Report

, Universal Music,

Sony BMG

EMI Group

and

Warner Music Group

about setting up a digital music service to rival Apple's popular iTunes site, according to

The Wall Street Journal

. It will include Amazon-branded digital music players that will be designed by and built for retailers, the paper says. An Amazon spokeswoman couldn't immediately be reached to comment.

The article comes less than a month after the trade publication

Daily Variety

reported that Amazon was planning to sell digital downloads of movies. Demand for electronic media is expanding at a much faster rate than for books and DVDs, important categories for Seattle-based Amazon. Some analysts and investors say they are skeptical about whether low-margin digital media sales will significantly boost profitability of the company.

Amazon's move may be welcomed by the music industry, which has long bristled at the stranglehold Apple has over digital music. So far, well-heeled companies including

Yahoo!

(YHOO)

have failed to make any significant inroads against Apple. Ironically, Amazon accounts for about 10% of all digital music players, including iPods, according to the

Journal

Wall Street isn't optimistic about Amazon's shares. Only four analysts consider the stock either a buy or a strong buy, while 11 rate it as a hold and 9 as either a sell or a strong sell, according to Thomson Financial. Their average target price is $39, about where it's trading now.

The company's short-term profits have been hurt by its investments in initiatives including Amazon Prime, which gives people free 2-day shipping for a yearly fee of $79. Amazon also is adding employees and investing in technology, moves it says are needed to help the company over the long term.

Shares of Amazon fell 15 cents to $39.11 early Thursday.