Amazon Music Strategy a Wrong Turn

The WSJ reported Amazon's plans to offer an Amazon-branded iPod competitor and digital music download store.  I haven't done much work in this area yet, so please weigh in, but this strikes me as a startlingly bad move.

First, Amazon's entry into this business is shockingly and annoyingly late.  As with the Netflix DVD business, Amazon could have owned this category, but in the name of moving deliberately (or of trying to become all things to all people), it allowed other competitors to build a dominant market position.  No matter what the company says, winning significant market share in digital music is going to be much harder now than it would have been three years ago.

Second, non-iPod digital music players are a dime-a-dozen.  The reason they haven't taken off, in part, is that they are not compatible with what has rapidly become the (legal) industry standard--iTunes.  Some of them, at least to these rapidly aging eyes, even look cool, but this has proven irrelevant.

Third, the hardware business sucks.  Unless you have a unique product, as Apple does, it's the last place you want to be.  Why Amazon wants to become yet another manufacturer of branded music players is beyond me--especially when there seems to be another, far better, strategic alternative.

Lastly, on this point, Amazon would seem to be in an ideal position to launch a digital music store featuring all music standards, one that allows users to choose formats, payment plans, etc.  The labels must be clamoring for this (anything to disrupt Apple's dominance) and even Apple would probably benefit from having another source of distribution. 

Yes, the latter would be a tough sell, but the mistake Apple made in the PC business was not separating its hardware and software products.  The Apple OS could have pounded Microsoft Windows for years if PC manufacturers had offered it as a pre-installed option, but because one was forced to also buy an Apple PC to use it, the OS became an also-ran.  Right now, there are enough competitors in the music business that Apple would benefit from allowing a few, carefully controlled licensors to distribute the iTunes format, especially licensors like Amazon, which can sell a boatload of iPods.

The WSJ story also suggested that Amazon's jumping into the hardware player business might cause Apple to shut it down as an iPod distributor.  If this is really a risk, it seems a dumb one to take.  Amazon isn't the dominant global powerhouse it once was--and even in those days, it had trouble cracking some new categories.  In digital music, moreover, Amazon needs Apple more than Apple needs Amazon.

Disclosure: I've owned Amazon for years.

Comments

[anonywiki]

Steve Levitt had an interesting suggestion for dealing with the problem of digital music distribution: get people to do paypal donations to the artist.

What makes you think Apple's dominance can survive a well executed marketing campaign by any of the other competitors? Or (more likely) and anything-but-Apple alliance of interests (Real, MSN, AMZN, Sony)?

[Direwolf]

Good post, Henry. I've owned AAPL since early last year and I am a long-time Mac user. We have two desktops, an iBook, and four iPods.

I think the opportunity for AAPL is huge in Macs. I believe in the halo effect. Two things have converged. First, of course, is the incredible success of the iPod and the exposure that his given to AAPL with previous Windows only folks. Second, the way consumers use their home PCs has changed. The OS matters little when virtualy eveything most people do on their home PCs is digital media related: internet browsing, email, photos, music, videos.

Macs alone can drive AAPL shares as long as iPod sales remain decent. A cellphone/MVNO is probaly a winner as well for AAPL. 5% global market share is 40 million phones. At an ASP of $150, near where MOT is, AAPL is looking at a $3 billion revenue opportunity. Devoted AAPL folks like me would be able to give them 2% of that market share quickly.

All that said, I think you are right on about AAPL making a smart move to license iTunes distribution to one or two smart companies. On Wall Street that move would be game, set, and match as it would undercut the bear thesis that AAPL will screw up again by remaining propreitary.

[Asif]

If Amazon wants to get into this business, its best bet would be to acquire one of the existing music services such as Rhapsody (which I used for over a year) or Napster. With the threat of Microsoft entering this space as well (http://www.linuxinsider.com/story/32155.html), consolidation in this space is very likely to occur.

Personally I feel that both iTunes and iPod are going to face increasing competition from services such as Napster To Go and Rhapsody To Go which allow subscribers access to over a million songs. Check out my blog entry about the Rhapsody To Go service at http://www.sinletter.com/blogComment.aspx?id=1

[Jim Hillhouse]

Amazon can go after Apple's iTunes, but what it will get is the same result it garnered when it tried to compete with eBay. Zilch.

I think Amazon is a great company. But they have not exactly been fleet of foot lately, whether it was the delayed entry into on-line bidding, search engines, or music. And all they can do now is play catch-up. That's a looser strategy. If Amazon wants to win, I suspect they would need to define and enter the next market, which is video.

This is just another "iPod-killer" service that will, like all the rest, fall on its posterior because it doesn't complete the product/service circle for consumers the way the iPod/iTunes does. Until someone excels that, all comers will be fighting for scraps.

[alex]

Amazon's business is to be a distribution channel for the XXIst century, an infomediary with evolved logistics capabilities. They must remain standard neutral and improve customer convenience in the process of acquiring digital music. Forcing lock-in is not feasible for a late entrant. Seeing the world with the eyes of the customers can be beneficial sometimes...

[KH Stroem]

I tend to agree with your opinion - Firstly, it is frustrating to have a company you want to succeed fumble. We want Amazon to offer a download service - and we have waited for too long already.

Assuming it is no option, not to get into the download service we are faced with the choice of whether or not to get into the HW business.

In essence they could choose to make a no/low risk partnership with the top players of open standard players with kick-backs for the HW vendors to have the service promoted with the HW (similar to ISPs on PCs). Obviously they should invite Apple to the party in case they would want to dance.

Alternatively they could place their ressources onto marketing their own branded line of players. This business is cut throat, low margin and will prevent any download partnerships with the other hw vendors.

Considering the RoI opportunities of the two - I think Amazon has chosen the worse of the choices.

Disclosure: I dont own Amazon.

[David M Gordon]

Hi, Henry,

I have a different question albeit on the same topic (Amazon.com)...

Amazon came up while speaking yesterday with a reporter from the WSJ on a different topic. The question became: why is it that no matter the amount of revenues Amazon pulls in (billions), it fails to drop to the bottom line as expressed by increasing and positive eps. It cannot all be due to free shipping.

What do you think?

[fCh]

For a different perspective on how Amazon.com and few other sites could offer a serious alternative to the way we consume music, click here. In essence it's about markets as conversations, and the sequence could be: new music first and then change the nature of the music industry as you become more successful.

[Bruce Lee]

I sort of think digital music makes sense for Amazon. They sell books and e-books. Why not digital music to complement their CD inventory? Also, don't you think the Apple-Amazon relationship goes both ways? Sure Amazon makes a lot of money selling ipods, but why would Apple want to close a vendor that sells 10% of its ipod inventory? I'm sure other vendors would gladly take up the slack, but would Apple be willing to flex its muscle and gamble that customers would follow? Finally, I agree that non-ipod MP3 players is a hard sell. There are quite a few out there, but none of them as impressive as the ipod.

[alex]

hia!my name is Alex i love wrong turn somuch nd i wudlike lods of pictures of wrong tur thats alli have 2 say bye xnd i am11 years old