Amazon's aPod takes on the big Apple

Jeff Bezos, the founder of the online retailer Amazon, was the poster boy of the dot.com era, but he has ceded that status in the new world of digital media to Apple's Steve Jobs. Now he wants it back.

Amazon, most famous for shipping books and CDs in the post, has started to look prehistoric as the iPod generation downloads music in seconds from Apple's all-conquering online music store.

But the company is hatching a plan to topple Apple's iTunes, with the launch of its own downloading service and, most intriguing of all, a possible rival to the iPod. Geeks are already calling it the "aPod".

The company is in advanced talks with the big four record companies to sign up the music content it needs, and has been sounding out the leading digital device manufacturers, including Samsung. A thunderous marketing launch could come as soon as the summer.

The rumours have reached fever pitch in recent days, and there were suggestions yesterday that Mr Bezos plans to sell the cut-price Amazon music player bundled with a subscription to an all-you-can-download service based on the company's website.

It is no secret that the music industry's senior executives have been looking to back a serious rival to iTunes in the hope of clawing back power to set prices. The industry and Mr Jobs have sparred over iTunes' refusal to charge more for certain music or to offer more special offers.

So far, though, subscription services have hardly made a dent and iTunes has an estimated 80 per cent of the downloading market. Napster and Microsoft's MSN are among many high-profile brands which still have not cracked the market. In the UK, HMV has been unable to translate its considerable reputation as a music retailer into success for its own all-you-can-download subscription service, relaunched in the spring.

Google is believed to be examining the possibility of moving into music downloading, too. But it appears to have cooled on the idea and denied recent rumours that it was about to take over Napster.

So why do the four big music companies - Sony BMG, Warner Music, EMI and Universal - think Amazon can succeed where others have failed? In short, because Amazon starts with 55 million customers, many of whom have bought music - albeit in physical form - through the site. It is also likely to offer digital versions of albums and films to customers who buy CDs and DVDs, helping attract people who are only slowly adapting to the new technology.

Martin Pyykkonen, an internet analyst at Hoefer & Arnett, said: "I don't know if I would bet on them taking the No 1 slot from Apple, but Amazon does have a very strong brand and the potential to capture market share in a digital music market that is showing strong enough growth to support new players."

Warner Music, home to Green Day, Madonna and James Blunt, said this week digital revenues over the Christmas quarter had more than tripled on 2004 and were 30 per cent higher than the previous three months. It has not made up for falling CD sales yet, the company said, but digital sales - without packaging and shipping costs - are much more profitable.

Amazon has remained tight-lipped on its plans, which are still not signed with the record labels and have not been finalised, but observers believe the bundling of its service with a new music player could be one of the keys to success.

According to one internal proposal, the device could be pre-loaded with music. That would set it starkly apart from the iPod, which is usually sold empty, forcing users to spend hours uploading CDs. Visits to downloading sites surged 50 per cent above average on Christmas Day as recipients of new gadgets filled them with music.

Apple has established its hegemony because of the unique digital music format used by iTunes and iPods. The ubiquity of iPods, and the failure of other electronics companies to come up with an equally desirable player, has raised compatibility issues for downloading services selling music in other formats.

The design of any "aPod" would be crucial, in that case, and raises other worries. One Wall Street analyst pointed out that one in 10 music players, mostly iPods, are bought on Amazon. "I imagine Apple and Amazon will be having some heart-to-heart negotiations, and there will be some friction between them, particularly if Amazon is undercutting the iPod," he said. "Ultimately, I think Amazon can be confident Apple will decide Amazon remains a strong distribution channel for them."

Apple shares have fallen more than 15 per cent from their peak early this year, as Wall Street has feared growing competition. The decision to cut prices of the iPod nano last week was taken badly.

But Amazon, too, has been under pressure. Investors have been making increasingly shrill demands to get sight of its digital strategy, concerned that the company may its inflated internet stock rating. Bears of the stock think it should be valued more like a traditional retailer, since its sales growth is set to slow below 20 per cent this year.

The shares fell 13 per cent on one day this month, when its latest revenue figure was below expectations and the company cut its profit forecast for the year. Mr Bezos cited a bigger salary bill for computer engineers working on new technology. Amazon has also spent money on internal systems to improve efficiency - vital as increasing competition in e-commerce is driving down selling prices.

Chart-toppers in the music download market

VIRGIN DIGITAL AND HMV DIGITAL

These offer competent - and legal - download sites but there have been suggestions that the big players have stopped competing on price.

NAPSTER

The original file-sharer, it was the target of much corporate ire but is now respectable. Once thought to be a takeover target for Google, it posted a loss of £10m in the last quarter.

MYCOKE

This is Coca-Cola's internet ploy to lure teenage music fans and sell them more fizzy drinks in the process.

BIGNOISEMUSIC

Oxfam's attempt to save the world through music was launched in 2004 with a limited catalogue of 300,000 tracks, costing 75p to download. Of this, 10p goes to the charity.

KARMADOWNLOAD

This site claims to be the largest legal download service for independent music in Europe. Its aim is to offer cutting-edge music which larger outfits don't have. Tracks cost 89p each, with albums going for £7.99.

BLEEP

The selling point here is that it does not require users to download software before using the site. It allows you to listen to the first 30 seconds of any song for free.

BITTORRENT

It is public enemy number one as far as the entertainment industry is concerned. Some research shows it is responsible for a third of all internet traffic, a testament to the excellence of its file-sharing technology that allows users to share huge files.

GROKSTER

Visitors to greeted with this message, 'There are legal services for downloading music and movies. This service is not one of them'. Grokster requires you to download file-sharing software before you can get music for free. In January, a postman became one of two people in the UK to be convicted and fined for illegally downloading music. He said he simply did not know he had acted wrongly.