Can Amazon take a bite out of Apple?
Two masters of digital media are set to fight tooth and nail over movie downloads this summer.
By Erick Schonfeld, Business 2.0 Magazine editor-at-large

SAN FRANCISCO (Business 2.0 Magazine) -- is spending heavily to build a digital-download business - and that has investors worried, as it prepares to take on Apple, the undefeated champion of online music, in a fight over online movies.

The online retailer has yet to start competing with Apple (Charts), and it's already taken a beating. Following Amazon's report on Tuesday of second-quarter earnings that dropped 58 percent to $22 million, its shares fell 17.5 percent by mid-morning Wednesday to $27.50, a 52-week low.

A big part of Wall Street's concern has to do with the more than $300 million Amazon has spent so far this year on technology and content, with much of that believed to be going towards its digital media inititaive.

As Citigroup analyst Mark Mahaney put it in a recent report: "Still no clear signs of ROI [return on investment] on all that technology and content spending."

But don't underestimate Amazon (Charts) - these combatants may be more evenly matched than you think. And whoever prevails in this fight, anyone who'd like to watch a movie without a trip to the video rental store or the wait for a Netflix envelope in the mail is set to win - in just a few weeks.

Amazon has long been rumored to be developing both a digital music and video service to compete with Apple's iTunes. Now, a report in Advertising Age suggests that Amazon is having second thoughts about competing in music but is ready to launch a movie and TV download service in mid-August.

In the meantime, Apple CEO Steve Jobs has reportedly been in tough negotiations with Hollywood so that he can launch a movie store on iTunes around the same time.

A head-to-head contest between Amazon and Apple for supremacy over digital movies could be the biggest thriller of the summer. No one's yet made a very big business from selling movie downloads over the Internet, but both Amazon and Apple have a good shot at it, and for very different reasons.

In this corner, the reigning champ

Apple's advantage is obvious: Through iTunes, it already dominates the legal music download market. It would be relatively straightforward for the company to add movies to the TV shows and other videos it already hawks online.

Apple also makes the most popular mobile device on which these movies can be watched: the video iPod. And Apple has unmatched marketing prowess.

One of the main reasons iTunes is so successful is because Apple devotes most of its sizeable marketing budget to it and the iPod. Expect more of the same with any movie download service: Apple can tie in marketing of its video iPod to any new movie offerings.

And in this corner, the challenger

For its part, Amazon enters this battle from necessity. Music CDs, movie DVDs and books make up two-thirds of Amazon's revenues. As they go digital, so must Amazon.

But being the biggest retailer on the Web comes with advantages. Since it already does a brisk business selling Hollywood's DVDs, Amazon has negotiating power with the studios. It has a better chance than most upstarts in persuading studios to release movies online at the same time that they make them available on DVD.

According to some reports, Apple, by contrast, may have to buckle to Hollywood pressure and rent out digital movies instead of selling them outright.

If the price is right, though, this might not be such an Achilles heel. Most movies you don't watch over and over again the way you might listen to a music album repeatedly, and consumers are used to renting movies already.

On the marketing front, Amazon can direct its considerable Web traffic to its digital video service the day it launches. With millions of people going through its online store every day, it could easily start promoting digital downloads of movies to that captive audience.

Apple may seem to have an advantage with the video iPod, which it can make sure works well with any movie download service it launches. But Steve Jobs himself has dismissed the notion of watching two-hour-long videos on a small screen that you have to hold in your hand. People prefer to watch movies on big screens. As long as Amazon can get the movie to your PC, or better yet, the flat-screen TV in your living room, it should do all right.

And Amazon has a knockout punch of its own: its huge database filled with customers' DVD purchase histories. Apple has accumulated enough data about song purchases to be able to recommend new music to iTunes users - but it's starting with a nearly blank slate in movies. Amazon has vastly more data on the movie-buying habits of its customers.

It's a pretty even match, and one that should be fun to watch. Top of page

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