The Financial times and Newsweek have reported that Amazon and Google are considering launching music download services. US music industry insiders are expecting Amazon to move soon, but a UK launch of an Amazon download service may not take place this year. Amazon UK has refused to comment, while Google has already registered the name Googlemusic.com and has previously been linked to Napster.
Since Amazon’s extensive diversification into non-core categories over the past two years, we believe it has taken its eye off the ball in its core market of music & video. Even though it is the market leader online, it is facing stiffer competition from more focused specialists such as Play.com. Despite its attempts to diversify, it still relies heavily on sales of physical media products, which over the coming years will migrate to digital formats.
The UK is the largest and fastest growing market for legal digital downloads in Europe. In 2005 26m tracks were downloaded, a fourfold increase on the previous year. And we expect demand to rise rapidly from around 3% at present to almost 20% of music sales by 2009. Amazon’s decision to enter the market is therefore essential to maintain its leadership in this market.
Google has already ventured into digital content, selling video clips through its online store. The search engine has denied links to a potential bid for Napster, which could provide it with the critical mass to be a serious player in the market. It has introduced a music search feature, enabling users to type in an album name bringing up reviews, lyrics and links so that users can either download tracks or buy the CD. However it has a lot of work to do in this respect and Google currently lags behind rivals Yahoo and Microsoft, which have well established music download services.
Amazon’s plans are at a more advanced stage than Google’s. The retailer is currently trialing an online film service in the US, with a view to launch this summer. The innovative service enables customers who purchase a physical DVD to view the film online. It plans to introduce a similar service for music, with consumers receiving a digital version of the CD they purchase enabling them to transfer tracks to a portable music player. The retailer is likely to introduce it before the final quarter of this year in the US, with a UK launch likely in 2007.
The development of music download services by these influential players will be a significant step for the sector. Despite the proliferation of digital download sites over the past year, the market continues to be dominated by Apple’s iTunes service. However, its AAC encoding format (restricted to iPods only) and fixed pricing model is causing considerable consternation among record companies seeking higher royalties. The non-compatibility of legal digital downloads at present explains why consumers have yet to fully embrace them and the versatility offered by tracks on illegal peer-to-peer sites ensures they continue to be extremely popular.
Amazon’s introduction of a digital downloads service should at last provide consumers with a viable alternative to Apple’s digital offer and paves the way for long term growth.
