Amazon in talks on digital music service

NEW YORK - Online retailer Amazon.com is in advanced talks with four major music companies on starting a digital music service as early as this (northern) summer to compete with Apple, sources familiar with the matter said today.

Amazon is seeking to create a viable rival to Apple Computer Inc.'s iTunes music service and its fast-selling iPod music player, both of which dominate the digital music market, they said.

The Seattle-based No. 1 online global retailer is in talks to license music from Universal Music Group, Sony BMG, Warner Music Group Corp. and EMI Group Plc , according to sources briefed on the discussions. Deals have not been reached yet.

"This seems like a very robust service - It will have plenty of support from the music industry," one source said.

The news was first reported by the Wall Street Journal on Thursday.

Amazon's service, which one source said was originally slated for a spring launch, could become a significant new competitor and undercut Apple's stranglehold on the nascent, but growing industry.

Analyst Martin Pyykkonen of Hoefer & Arnett said that from a branding perspective, the idea makes perfect sense.

"Amazon has the potential to move up fairly quickly and become a strong brand in that space," he said.

Although sales and rental of music online remains a small percentage of the estimated US$30 billion worldwide music industry, double-digit percentage sales growth of digital music is being viewed as a beacon in a business wracked by tepid physical album sales.

Amazon is considering a subscription music service that would include a discounted portable music player bearing the Amazon brand, the sources said.

BORROWING THE WIRELESS PHONE MODEL

The player would be subsidized by the subscription service, an idea borrowed from the wireless phone industry, which sells lower-cost phones in exchange for long-term contracts for subscription services.

"That's a sensible approach," Phil Leigh, an analyst at Inside Digital Media, said. "It's going to take something to successfully attack the iPod."

What makes Amazon's entry attractive to the music industry is its experience selling consumer goods and what the company claims are more than 55 million active customer accounts.

The big test is whether consumers would be willing to subscribe or buy anything that may not work on the iPod, Leigh said, who noted in a research report that Amazon was late in coming to the market.

A plus for Amazon would be the substantially better margins from the music download business compared with Amazon's core retail business. Wall Street has been concerned by narrowing margins at Amazon and the shrinking pool of new product growth areas for the company.

But sales from digital music are unlikely to have a big near-term impact on Amazon's bottom line, Pyykkonen said. The company posted US$8.49 billion in sales in 2005.

"Let's be realistic about how long (digital music) would take to make a dent in this business," he said.

Amazon has been rumored to be in talks with independent film studios for an upcoming launch of a digital service for movies. In a January research report, Stifel Nicolaus analyst Scott Devitt wrote that Amazon's position as the largest retailer of media products on the internet made it "uniquely positioned to benefit from the transition to digital media," citing the loyalty of Amazon consumers.

Amazon, EMI, Warner and Universal Music declined to comment about a music digital service and Sony BMG officials were not immediately available.

- REUTERS