Amazon's Digital Download Challenge To Apple: Brand Doesn't Trump Experience (AMZN, AAPL)

Last week, various news outlets picked up the story that the world's top online retailer, Amazon.com, is planning its own digital download service to complement its CD sales. Details are sketchy, but music industry executives believe that the Amazon service will be based on Microsoft Windows Media Player (WMP) technology and that it may offer some new twists, such as an Amazon-branded digital player provided free to monthly music subscribers.

The reaction was predictable: Watch out Apple, a new Internet-savvy competitor is about to join the party and capture a chunk of the growing digital download business.

But is all the hype about an Amazon product justified? Many other major brands have taken on Apple and are failing. For example, Wal-Mart, the largest and most important physical distributor of CDs in the US market, has offered digital downloads for years and has had almost no impact on the market. Napster, the brand that launched the digital download revolution (the illegal, file sharing revolution), is also struggling to make a profit. Massive, global brands like McDonald's have offered free downloads that relied on Microsoft music solutions, and they have all been complete and utter flops. So why give Amazon the benefit of the doubt?

Let's examine the three pieces of the digital download puzzle that make Amazon unlikely to make much headway, even with its consumer-friendly brand. To succeed, Amazon needs:

1. Killer portable players. Apple dominates the portable music player market, plain and simple. Amazon is unlikely to find a consumer electronics partner that will out-design the iPod family or have anything like its cachet.
2. Great PC software. iTunes remains the PC app to beat. Amazon will have to either rely on Microsoft's software like every other Microsoft digital download solution provider or develop its own, which would be cost-prohibitive.
3. A popular music store. Amazon's music store would need to be easy to browse and offer music in a form consumer want. Subscriptions have proven to be only mildly popular, and all of the Microsoft-fueled stores fail to sell even a fraction of the downloads Apple has managed to sell. In fact, Apple is on the cusp of selling one billion downloads, while others are counting in terms of thousands.

If the rollout goes according to the plans we heard last week, Amazon will be another also-ran in the digital download business. Like Wal-Mart, it will attempt to sell its own store, but it will also have to continue to support the Apple juggernaut by continuing to sell iPods (neither store is foolish enough to ditch selling the world's most popular line of digital music player). And this straddle strategy will doom it to failure given Apple's huge lead.

When Amazon launches its digital download store, expect much fanfare and promotion from Amazon, Microsoft, and the loosely affiliated anti-Apple and anti-iPod crowd, but little change in the market.

Brands and digital music: Settle, wait, or work with Apple

Because success in the digital music business requires the seamless interaction between devices, players, and online stores, Apple is currently in the driver's seat because it controls and delivers high quality solutions in all three areas. Brand owners that want to participate in the digital music space have limited choices:

• Settle for working with ineffective Microsoft solutions. Brands that want in on the game today and can't find a way to work with Apple, can move forward with stores and promotions based on Microsoft technology. However, retailers and those running promotions should expect to get little or no return for their investment. While this strategy has been embraced by many high profile organizations, companies should save their money and protect their brand by choosing one of the following options.
• Wait for Microsoft to go head-to-head with Apple. Apple's toughest competition would be a two- or three-pronged, branded assault from Microsoft. In the two-prong scenario, Microsoft would promote its family of players (like its game console, the Xbox), its PC software, and rely on third-party stores. The problem for retailers like Amazon is that the competition will only be one click or one Google search away -- customer loyalty will be non-existent. In an unlikely and unwise three-pronged effort, Microsoft would mirror Apple and tie its own store tightly to its player and software. In this approach, third-party devices and retailers would be left out, but WMP-based digital download promotions would be much more successful.
• Hope Apple is forced to open up its DRM. The courts, legislative actions, or record label pressure through the withholding of content could force Apple to change its strategy and license its DRM, allowing third-party devices and stores to support both Microsoft and Apple DRM systems. But Apple won't voluntarily sacrifice its golden goose. While this solution would be a boon for retailers and those offering digital music promotions, any forced action would be fought for years in the courts and the court of public opinion.
• Join with Apple. Today, organizations can work with Apple to offer downloads redeemable at the iTMS just as Pepsi did (its high profile effort was thwarted by late or inconsistent delivery of redeemable products). But what about retailers? The best way for a retail brand to get a slice of the music pie from Apple would be to co-brand a store with Apple, similar in appearance to Apple's program with universities, but with revenue splitting on music sales. Would Apple go for it? As of today, we don't know of Apple's interest in this strategy, but you can bet that at some point Apple must either work to include the leading (CD) music retailers, such as Wal-Mart, Best Buy, and Amazon.com, or eventually be squeezed out when a Microsoft solution finally becomes viable.

One thing is for sure. Now that Apple has sold one billion songs on iTunes, no matter what strategy brand owners choose, pro-Apple media mentions and blog posts are going to drown out the combined and ineffectual competition for months to come. The only question is whether you are with Apple or against it.

Comments

[Justin Jarv...:]

There isn’t much in your post to disagree with, but perhaps I can offer some out of the box thinking (or maybe just crazy thoughts) related to the ongoing digital media consumption debate.

For starters, don’t forget that Amazon generates a significant amount of business by powering other retail sites. For music, they’re currently managing the back-end of Target’s music and entertainment site and fulfilling orders of physical CD’s (Target is getting into digital). With the few players that exist in the B2B digital music space (MusicNet and Loudeye, although more insignificant a player every day it seems), Amazon does have a rather compelling opportunity here. I haven’t seen this mentioned anywhere and maybe I’m way off, but the IFPI expects the number of digital download stores to increase 10-fold over the next several years and Amazon could be right there.

Another thought is Apple’s reliance (and dominance) on great design. Did I say great? I’m a Mac and iPod guy. I mean, Apple makes beautiful stuff! It doesn’t hurt that the iTunes user experience is fantastic as well. But my point here is that, even with the inferior interior of Motorola’s RAZR phone, it became a blockbuster primarily because of its slick design. Apple has been through this before and there’s good chance they’ll suffer if some slick new design comes along (with a bundled music service). Sometimes that’s all it takes. Consumers who buy on the basis of design are far more fickle than others, and most of the iPod owners are still PC people. At the end of the day, iTunes is successful because of the iPod, and the iPod became successful in large part because of its design (hardware and interface). And besides, everyone knows the mobile device is going to be the new battleground anyway.

And what about the brands that were mentioned? Pepsi had major problems with the two promotions that were mentioned (in large part because of logistics… “see through” bottles). But brand or ad supported music services like Pepsi Smash on Yahoo! or the new Napster, or fully owned branded entertainment sites that offer free music, movies and other digital content such as PowerbarTunes, paid in whole by large brands, are dramatically under recognized by analysts. As soon as Soundscan begins tracking non-traditional means of paid marekting and distribution (such as branded entertainment campaigns where the brand picks up the entire tab), you’ll start seeing a new name or two appear on the radar.

Justin Jarvinen
Founder & CEO, VerveLife
vervelife.com

2006 Jul 17 07:39 PM

[Ron McLendon:]

Amazon's download service needs work - a lot more work. I tried it and the system is caught in a loop or something. I DL the Unbox, installed it and tried to DL a TV episode. I was prompted to DL Unbox again. I cancelled and tried again. Once again I was prompted to DL the Unbox. After several tries I gave up. The TV episode never downloaded and I was charged five times for a download that never came through.

I emailed Amazon customer service so I'll see what happens.

2006 Sep 09 01:19 PM