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Feb. 13, 2006 issue - It's OK to feel sorry for Internet CEOs these days. In the past month, investors with lofty expectations have punished the stocks of such companies as Yahoo, eBay and Google. But no one seems to be having a harder time than Amazon CEO Jeff Bezos, whose famous goal was to sell everything from books to 200-pound treadmills over the Net. Even though Amazon just cleared a record $1 billion in quarterly sales, Wall Street is now more interested in the only e-commerce feature Bezos doesn't have—the delivery of music and movies digitally, a la Apple's wildly successful iTunes. "Amazon is especially well positioned to capture a bigger part of that business," Bezos told analysts last week—before his company's stock plunged 10 percent the day after it announced lower-than-expected profits. "But it's premature to talk in any detail about those initiatives."
Bezos's reticence, however, may soon soften. Last month, the Hollywood trade publication Variety reported that Amazon will launch an online movie service this spring. Customers who buy a DVD on the site, it said, will also be able to watch the movie online. But that's likely only the beginning of Amazon's plans. According to a music-industry insider who has seen the service, Bezos is working on a similar scheme for music. Customers who buy a CD will receive a digital copy of the album or song, which they can transfer to a portable digital music player. "It's the most well-thought-out, consumer-conscious strategy I've seen yet for digital music," says the insider, who doesn't want to jeopardize his firm's close relationship with Amazon. Several other music execs confirm that Amazon is hoping to launch later this year, before its busy Christmas season. (Amazon itself declines to comment on any future services.) "They realize that a very significant percentage of their sales are in physical media products that will almost certainly migrate to digital," says Citigroup analyst Mark Mahaney. "The writing has been on the wall for a long time, and Amazon knows that."
The problem for Amazon is that the rest of the industry knows it too. While Bezos once was hailed as an e-commerce visionary, he now joins the heads of Yahoo, MTV, Sony and Wal-Mart in following Steve Jobs's lead. Last week, Google reportedly was joining the fray, and involved in talks to buy the struggling Napster. (Google denied the rumor.) The biggest challenge for all these wanna-bes: more than 80 percent of all digital music sales occur over Apple's iTunes. Analysts think that its grip will inevitably weaken as a wide range of online music stores and music players hit the market—the same dynamic that hurt Apple in the early days of the PC business. But first, non-Apple MP3 players, which mostly run Microsoft software, have to improve to pose a solid challenge to the iPod.
If and when the playing field is leveled, Amazon will have some advantages. It has 55 million customers, many of whom already come to the site to buy music. It is also proficient at giving advice. Who else can so confidently declare that users who listened to Barry Manilow also enjoyed Ricky Nelson? And giving customers both a physical CD and a digital copy—which Amazon alone is well positioned to do—might ease the transition to digital music for late adopters.
Back in 2004, Bezos explained to NEWSWEEK that he was waiting to get into the digital music game because a "me-too offering wouldn't add any additional value ... I'm comfortable there will be a second, third and fourth generation of digital media services." Instead, he marshaled huge resources into R&D—$132 million in the last three months alone, much of it directed toward digital media. Meanwhile, the company that believed so strongly in moving quickly and grabbing first-mover advantage is now seen as a laggard. To change minds about that, Bezos will have to show his cards.
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