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As reported by Fortune Magazine, Amazon’s download music business has overtaken most of the competition. “Amazon (AMZN, Fortune 500) has overtaken competitors like Wal-Mart (WMT, Fortune 500) and RealNetworks' (RNWK) Rhapsody to become the second biggest online store after iTunes, according to market research firm NPD.” Fortune highlights the tremendous gap between iTunes, which controls over 75% of the download market and Amazon, which has yet to achieve a 10% share.
But the article misses the core of the Amazon strategy. Amazon has taken second in the download business and is at least in the top four for the sale of physical CDs. Add to this its ability to sell print-on-demand products and a rumored deal with MySpace for integrated sales, and you begin to see a strategy that may trail Apple but will leave every other music retailer behind.
The reintermediation strategy of both Apple and Amazon pushes content and affinity. The companies assume that consumers will frequent the same stores for commodity purchases – and for Amazon, those commodities include CDs, DVDs, consumer electronics, software, toys, and occasionally even books. The strategy is easy to understand when one looks at the low-ball pricing strategy for much of its music catalog, daily e-mails to its customers that create the digital equivalent of candy at the check-out counters, and proprietary software that improves the customer interaction and brands that interaction for Amazon. Apple has the same strategy, but limits its products to its own brands of consumer electronics and software, along with a more selective list of digital-only content.
Fortune’s article describes the steps Amazon is taking, but tries to place them in a retail paradigm. Until companies understand the software and contracting tools needed to create consumer affinity, they will see their marketshare decline to Amazon, Apple and other retailers who treat customer relations like social networks.
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