Exit Virgin, enter Amazon: Digital music in shuffle mode

Jonathan Arber
02 Oct 2007

It's been quite a week in the digital music retail space. However, for both of these announcements it's a case of 'when' rather than 'if'.

"Virgin launched its digital music subscription service in late 2005, but even at that point it was clear that Apple was running away with the digital music market. Virgin Digital never really built up any momentum in the UK or the US, something not helped by its subscription-based business model, which has so far not found favour with consumers.

The fact that all songs downloaded from the service will become unplayable once it closes its doors will only further reinforce the perception that the subscription model represents poor value. The announcement has been positioned as part of the Virgin Group's move out of music retail (it has also sold its chain of high-street stores), but we have to question whether the services would have been sustainable in the long term in any case. Similar services from MTV and AOL have shut down or merged in recent months, and we expect to see yet more casualties within the next 12 months.

While Virgin is making a hasty exit, Internet retail giant Amazon is jumping feet first into digital music. Having been widely rumoured for years, it finally unveiled its AmazonMP3 service last week - and first impressions are excellent. As the name suggests Amazon is selling DRM-free MP3s, at 256kbit/s quality, for $0.89-0.99, and has all the major labels on board, bar Sony and Warners.

This means that it is selling digital music that will play on pretty much any piece of hardware, including iPods, at higher quality than iTunes, and for lower prices. Given that it is already a key consumer destination for physical purchases, there seems to be plenty of opportunity for it to leverage its existing business. This might be the first digital music service that stands a serious chance in taking some business away from iTunes.

But that doesn't mean Apple should be worrying - quite the contrary. The AmazonMP3 service may well entice more consumers into purchasing digital music, but they're also going to need something to play it on - and chances are, they're going to choose an iPod. Apple is primarily a hardware company - that's where it makes its money. iTunes may be an exceptional promotional tool for the iPod family of products, but it is hardly a key revenue generator for the company. If Amazon was to launch an attractive digital music player, then Apple may have cause for concern, but we believe this new service is likely to be beneficial in the long-run.

Perhaps more importantly, it is good for consumers, and hopefully marks the beginning of an industry-shift towards DRM-free. After all, the restrictive business models offered by Virgin Digital and its ilk are hardly looking promising.

Jonathan Arber is an analyst working within Ovum's [email protected] team

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