Amazon accelerates its move to digital

With the No. 1 source of music sales now an online downloading service, Amazon.com looks at the development of its digital offerings with a sense of urgency.(From The New York Times)
Written by Natalie Gagliordi, Contributor
Over the last 14 years, Amazon.com has mastered the art of getting physical copies of books, music and movies to customers through the mail. Now it is trying to add to its repertoire in a hurry.

The overall market for entertainment and information is inexorably going digital. One day, most music, movies, and perhaps even printed words will be sent as bits over the Internet instead of in bulky boxes. More than half of the company's $15 billion in sales last year came from CDs, DVDs, and books, shipped from Amazon's 30 cavernous distribution centers around the world.

Last week, in what could be an omen of this shift, Apple proclaimed that its iTunes store had surpassed Wal-Mart Stores to become the No. 1 source of music sales in the United States. Amazon, which still sells mostly CDs, was the No. 3 seller last year but has since lost market share and is now tied with Target for fourth place. Best Buy is No. 3.

"Digital is where the growth in music is, and other industries are likely to follow," said Bill Rosenblatt, chief executive of GiantSteps Media Technology Strategies, a New York consulting firm. "Amazon needs to position itself to capture that."

If there were a Committee for the Preservation of Amazon.com, it would include Steven Kessel, Bill Carr, and Ian Freed. Kessel oversees digital efforts for the company. Carr is in charge of the Amazon MP3 digital music store and its Amazon Unbox video download service. Freed oversees the company's e-book-reading device, the Kindle.

As is typical of executives at Amazon, its digital chiefs are stingy with details about their plans. But in an interview, they emphasized the importance of the company's new online offerings and said a sense of urgency now underlies its digital efforts.

"We wake up every day thinking about digital," said Kessel, senior vice president for worldwide digital media, who reports to Jeffrey P. Bezos, Amazon's founder. "Jeff once said he couldn't imagine anything more important than reinventing the book. I think that sums it up really well, if you think about that across all our media products."

Amazon has reached, in a sense, the end of Phase One of its digital media rollout. The Kindle was introduced in December. The company unveiled its digital TV and movie store, Amazon Unbox, in the fall of 2006 and gave TiVo owners access to the service directly from their televisions last summer.

The MP3 music store arrived last fall after years of rumors about its development. Amazon's digital executives said they worked on the service for four years. At one point, they said, the company pursued an online store with music that would have been protected by the antipiracy locks known as digital rights management software, or DRM. That would have made the songs unplayable on Apple's line of iPods, which dominate the market for music players and cannot play protected tracks other than those from the iTunes store.

"We made the decision that the right customer experience is music that would play on all devices," said Carr, vice president of digital media. But the major music companies were wary of releasing music in the unprotected MP3 format.

"We thought we would be launching only with independent record labels," Carr said.

To Amazon's surprise, all four of the big record labels quickly signed on, in part to create a strong Internet alternative to iTunes and counter the influence of Steve Jobs, Apple's chief executive, in the music business.

Amazon does not release sales figures for its digital initiatives, so their initial success is difficult to gauge, although by all accounts the MP3 store has quickly become one of the top sellers of digital music.

The executives say they are happy with the service's progress and are focusing on adding international music and expanding the service overseas. But they also say that most customers probably do not understand that songs bought in the MP3 format are more flexible and can be transferred to a greater number of devices.

"The average consumer probably doesn't understand whether music has or does not have DRM," Carr said. "The point should be that it's a consistently good experience for them. What we need is for that word of mouth to grow and more people to try it."

To that end, the company has begun using its marketing strengths and repositories of customer information to direct people to these new digital offerings. The recommendations are subtle. People with a history of buying alternative rock music on Amazon, for example, may find the site pitching them the new R.E.M. album, "Accelerate," in both CD and digital form.

"Our job is not to take all these people and have them stop listening to CDs anymore," Carr said. "Our job is to introduce them to the fact that they now have a choice to do both."

The Amazon Unbox video service may be in for the most striking overhaul of all the company's digital services. There are more than 30,000 movies and TV show titles on the site available for rent or download. But the videos play only in Microsoft's Windows Media format and are not accessible from many non-Windows devices, like Apple computers.

When asked how much business Amazon is doing with Unbox, Rosenblatt of GiantSteps said: "Probably very little. But is anyone doing a lot of business with downloadable movies? I think the answer is, not even Apple is."

Kessel carefully describes Unbox as in its "very early days" and says customers should expect "a lot of innovation from us in this business."

The executives declined to be more specific. But Amazon recently ran an online poll asking users what new features they would like to see in Unbox. Likely possibilities from that list include a high-definition video offering and the addition of streaming video to the service, so customers could watch video almost instantly. (Netflix has a similar "watch it now" streaming video feature available for subscribers.)

The Amazon executives also suggested that their deal with TiVo to bring Unbox videos directly to television sets is only the first of many such arrangements.

"The TiVo relationship is not exclusive in any way, shape or form," Carr said. "We have other relationships and we are perfectly capable of delivering video to other hardware devices."

The Kindle electronic book reader, now four months old, is another primary cog in Amazon's digital strategy. Sales across the book publishing industry are flat; e-books represent one possible future. But the first priority for Amazon is actually getting the device into people's hands. The company has experienced constant shortages since the Kindle went on sale in December.

"We obviously want to get it fully in stock as quickly as possible," said Freed, vice president in charge of the Kindle.

Freed said that the Kindle was first and foremost a reading device, but that it could also serve as a platform for at least some of Amazon's other digital offerings. The device can play MP3 files and audio books from Audible, the online audio book retailer that Amazon bought last month for $300 million.

In general, Amazon's digital team expresses urgency but does not appear to be in a rush. Kessel noted that it took the company five to seven years to build many of its businesses--books, consumer electronics--to maturity. He expects digital offerings to follow the same path.

"One of the assets of Amazon, we believe, is a culture that supports investment in future businesses," he said. "You have to be patient and you have to be relentless as a company to be able to do that."

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