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Digital Audio Insider is David Harrell's blog about the economics of music and other digital content. I write from the perspective of a musican who has self-released four albums with the indie rock band the Layaways.

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May 18, 2007

The Amazon Announcement
by David Harrell



Some thoughts on Wednesday's news:

Although the press release didn't mention pricing, it seems inevitable that Amazon.com's music download service will challenge Apple's iTunes store on price. Given that Amazon seems to be selling more and more CDs for $9.99 (12 out of the current top 25 are selling for $9.99 or less), I'd be amazed if Amazon didn't offer full-album downloads for $8.99 or less.

According to Hypebot's sources, that might be the upper end of the price range, with full albums starting at just $4.99 and individual tracks selling for 89 or 99 cents.

Whatever the prices, though, I'm certain that for self-released musicians, selling album downloads via Amazon will pay better than selling physical CDs. Last year, I broke down the math for what we net for selling a CD for $9.99 through the Amazon Advantage program. Because of a "just in time" inventory policy that results in re-orders of a single disc, postage costs are maximized, leading to a per-disc net that's not much better than that which results from a full album download from eMusic. (Which "costs" an eMusic subscriber less than a third of that $9.99 price!) CD Baby's catalog, which supposedly accounts for about a third of the iTunes catalog, was delivered to Amazon in 2006 and will no doubt make up a large percentage of the initial Amazon inventory.

I'm curious about what -- if any -- role there will be for free music from Amazon. Until last year, Amazon.com featured a robust free download area, with the option to download free mp3 tracks from both self-released albums and releases from the larger indie labels (Matador, etc.). But much of that functionality was removed last year -- you can still search for and download free tracks, but album pages no longer provide direct links to the free downloads and it doesn't look like any new ones have been added since early 2006. Perhaps Amazon thought it would be odd to offer free tracks on the same page where downloads are sold.

Most analysts and industry commentators seem to think Amazon has the best shot at competing for the market share that Apple so thoroughly dominates. Though Ethan's Smith's take on the announcement in Thursday's Wall Street Journal was somewhat muted:
Amazon, one the biggest and best-known retailers in the world, already has deep knowledge of its customers' music tastes that comes from years selling compact discs to them. It's the latest in a growing line of retailers attempting to challenge iTunes. But Amazon's track record and its approach to digital music may not give it much advantage, at least early on.
I'm firmly in the camp of those who think Amazon has some huge advantages in this market. Pricing will matter, as will Amazon's potential ability to bundle downloads with either physical CDs or even with all of the iPods and other music players it sells.

Yet more than anything, I think it comes down to comfort level. Assuming that Amazon can eventually get the other three major labels on board with mp3 downloads, here's the reason it has a good chance to succeed in (or maybe even dominate) the download market:

The biggest potential for growth in the download market is among consumers who don't currently purchase music downloads. And Amazon.com is in a better position to sell to those customers than iTunes, the Zune Marketplace, eMusic, etc.

Why? Because a large number of those potential new download customers are ALREADY Amazon.com customers. I don't have the numbers in front of me, but as the world's largest online retailer, it's safe to assume that Amazon's current base of music purchasers exceeds iTunes' customer base.

And if you haven't purchased music downloads before, it'll be easier to do so from an online retailer that you already shop from, that already has your credit card information, and that you already know and trust.

That's not to say customers don't trust Apple, etc., but the barrier to purchase is higher -- for iTunes or Zune you need to install rather large pieces of software to your computer. For eMusic (which Amazon is unlikely to compete with on a per-track price), you need to set up a subscription. While I'm assuming there will be some sort of download management system necessary for the purchase of Amazon.com downloads, it will probably seem less onerous to current Amazon customers than the installation of software from other online music retailers or entering into a subscription agreement.

Finally, for all of the talk of the elegance and simplicity of the closed-platform iTunes/iPod system, I don't think consumers have the same loyalty to the iTunes store as they have to their iPods. They may LOVE their iPods, but they're not necessarily in love with purchasing music from iTunes.

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    THE LAYAWAYS

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