Amazon Poised to Enter Music Fray

The months of rumor and speculation about Amazon.com (Nasdaq: AMZN) joining the digital music download business appear to be reaching a fever pitch and observers say it's only a matter of time before Amazon's music service debuts and makes a run at market leader Apple (Nasdaq: AAPL).

Amazon could not be reached for comment on the newest reports that it has such a service in the pipeline. And while the e-tailer has never confirmed it was preparing a download offering, the circumstantial evidence is strong.

Earlier this year, Amazon invited some customers to answer a questionnaire about their music download habits, with questions focusing on why customers continued to buy CDs and on whether users preferred a pay-per-download -- the model Apple uses -- or a subscription model that is being championed by the new Napster and others.

Customer Service Reputation

More recently, online sites reported a job posting seeking a music acquisition expert to help build a catalog of digital content for an Amazon download offering. Also, reports say that music label executives have had conversations with Amazon about licensing music to it.

It's believed that Amazon would offer both pay-per-song and subscription options to customers, but it's still not clear how many songs an Amazon catalogue would feature from the outset. Analysts say that the retailer's strong customer service reputation, which extends to on-site features such as customer and editorial reviews of content, could also be leveraged to make a stand in the crowded music field.

Music has long been one of the core businesses of Amazon and it's likely that it is feeling the effect of the move away from buying CDs and toward purchasing songs or albums digitally. In fact, analysts have long believed Amazon would launch a digital download service of its own shortly after Apple set the bar with its iTunes Music store.

Fashionably Late

"I think it only logical that the leading seller of music online should be in the digital side of the business," said Jupiter Research analyst David Card. "If you're in the music business, you should sell music however your customer wants to consume it."

Card said despite the lengthy head start for the iTunes Music Store and the strong market share that the Apple iPod enjoys among early adopters, Amazon and others still refining their services are not late, with the real long-term market still very much up for grabs. While others have taken a run at Apple with only limited success , at least to date, Amazon's base of millions of registered customers and its 10-year history as an electronic retailer are a strong foundation on which to build an iTunes rival.

"Amazon has great, loyal customers and is very good at upselling, recommending, and service," Card said. In the long run, retailers will be just one category of players, along with media companies -- think Yahoo (Nasdaq: YHOO) -- and the labels themselves. "I do hope Amazon, if and when it enters, does a subscription service as well as downloads, since downloaded singles are pretty much unprofitable."

Profitability might be one reason that Amazon is going slow. It has run into problems keeping itself in the black of late, a fact that it attributes largely to its free and discounted shipping offerings. It might also want to put a strong electronic payment option in place that doesn't rely on users having credit card accounts, such as PayPal or an alternative, Card said.

License and Registration

Another factor that might be holding Amazon back is licensing.

While labels have become eager to partner with established music sites such as iTunes, Napster and RealNetworks (Nasdaq: RNWK), they are likely asking tough questions about the ability of Amazon to ensure that songs are not copied illegally.

That will mean having a digital rights management (DRM) solution in place that can offer the same protection that the iTunes downloads have for labels -- assurances that files will only be copied a limited number of times, for instance, or played on a limited number of devices.

One way around that would be a partnership with a third party that would run the music download or subscription services, much in the way that Amazon runs other retailers' operations. The Wall Street Journal reported that Amazon was talking with MusicNet about doing just that.

Offering music downloads would be another way to expand the Amazon menu of products for sale, something that Amazon has been aggressively pursuing for several years, after moving away from its original tight focus on books, music and movies. It's also said to be working on a movie rental business that would challenge Netflix (Nasdaq: NFLX) in the U.S.