February 10, 2006 9:56 pm

Rivals aim at iTunes’ grip on music downloads

Amazon and Google are separately in talks with music industry executives about new digital music services that could break Apple’s grip on the fast-growing market for legal downloads.

Senior executives of two of the world’s four largest music companies, who were gathered in Los Angeles for this week’s Grammy Awards, said they were keen to collaborate with both companies to create competition for Apple’s iTunes service, which claims a 70-80 per cent share of the world’s largest markets for legal digital music sales.

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“I do believe Amazon and Google will do something serious,” the chief executive of one large music company told the Financial Times. “We have had active communications in the last 60 days.”

Amazon was further advanced than Google in its plans, he said, and could launch a download service as early as the second quarter of this year. Google had “very serious” discussions with the music industry late last year, he said, but these are now moving more slowly.

Last week Google said that it had “no plans at this time” to develop a music store, and has denied rumours that it could bid for Napster, the now legal online music company.

Richard Doherty, analyst at Envisioneering Group, said a digital music service from Amazon or Google would “certainly shake things up more than [Sony and Microsoft]”, whose online music stores have had limited success.

The music industry’s eagerness to collaborate in the creation of new legal digital services shows its determination to ensure it does not lose control of its pricing as digital music takes an ever-greater share of the market.

Last year’s three-fold growth in the legal market for music downloads and mobile phone ringtones to $1.1bn almost offset the decline in sales of CDs. But music industry executives have complained that Apple’s model of charging a fixed 99 cents or 79p per track is holding back the market.

The executives would like to support new services that offer flexible pricing - the ability to charge a cheaper rate for promotions or for out-of-favour tracks while charging a premium price for new hits and longer classical works. They are also hoping any new service will offer the ability to deliver music to many different devices, rather than Apple’s iPod alone.

Amazon’s interest in moving from shipping physical CDs to offering tracks and albums for digital delivery comes as it is also in discussions with film studios about launching a movie download service to counter the digital challenge to its DVD sales.

The head of one Hollywood studio told the Financial Times: “I think Amazon will do best” in the battle with Google, Yahoo and other online competitors to deliver films digitally.

Jeff Bezos, Amazon’s chairman and chief executive told analysts this week its investments in new digital services were “a longer term initiative for us.” He said he was “excited about the opportunity” in digital media and suggested Amazon could take a larger share of the digital media market than it currently has of physical media sales, given its existing online platform and brand position.

Anthony Noto, a Goldman Sachs analyst, highlighted defensive reasons for Amazon’s interest, saying he was “concerned that the shift toward digital consumption of music and home video will negatively impact Amazon unless it rolls out a more comprehensive digital media product in the near term.”

Studios have also held discussions with Wal-Mart, the world’s largest retailer, about installing kiosks in its stores from which consumers could use digital technology to download films on to portable discs.

Additional reporting by Jonathan Birchall in New York

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