Amazon MP3 debuted yesterday (read the press release here). In Google fashion, the service -- the digital download store of online retail giant Amazon.com -- is marked as "Beta," signifying that it is not quite ready for mass adoption. That caveat aside, the service is open to anyone, so the beta tag is more likely a strategy to avoid consumer backlash from any early hiccups associated with using the service (remember Google Video's -- pre-YouTube -- early days?).

The digital music store will complement Amazon's existing sales of physical CDs. Its primary competitor will be Apple's very successful iTunes Store (iTS). The most important aspects of Amazon's new offering are:

• Files are not wrapped with digital rights management (DRM) technology. DRM is technology that controls how, when, and where a media file, such as a song, can be played. Files without DRM can be copied and played on any device, can be emailed to friends, and can be burned to a CD unlimited times. Only the service's terms of use and accepted copyright laws -- and the users willingness to obey them -- will keep these files from being illegally traded.
  
  
• Songs are in the MP3 format. MP3 is a music file format that can be played on any PC or Mac and, more importantly, any portable music player. Previously, almost any major non-Apple iTunes store relied on Microsoft for DRM technology. The result was that the music could not be played on an iPod. With MP3 files without DRM, any device can store, access, and play or stream the Amazon files, including an Apple iPod, a Microsoft Zune, and a Sony PlayStation.
  
  
• The store is a Web page. Unlike Apple's iTS, Amazon MP3 does not require that users have or download and install a PC or Mac application. For existing Amazon customers, shopping for digital music will feel the same as shopping for other products. The only difference will be a platform-specific download helper application -- the Amazon MP3 Downloader -- designed to make it easy to mange the process of downloading a file and importing it into a music management application.
  
  
• It has some major label support. The Amazon store launches with music from two of the big four music labels: EMI and Universal Music. Apple only has EMI support for DRM-free downloads (all other major labels sell through iTS, but with Apple's DRM, called FairPlay, attached to the files). Given that Apple CEO Steve Jobs has refused to allow the labels to have hardly any variable pricing -- think of popular songs costing more, older songs selling for less -- expect more labels to sign up with Amazon.
  

No security on any available song 

As mentioned previously, the most interesting aspect about Amazon's offering is that all of the digital tunes are available without DRM. DRM is the technology and music industry's term for a software control wrapper around media files, including audio files, that limits the use of that file. The software on a computer or digital music player will check with the DRM in the file and compare that to the rights of the user. Those rights, usually stored on the local device, such as a PC or portable MP3 player, but tied to the servers of the DRM-managers (usually a store or a technology provider, such as Apple or Microsoft), determine allowable activities, such as who can play the song, how often, on what devices, and whether it can be copied to a CD.

In the service's FAQ (read it here), Amazon makes it clear the advantages of foregoing DRM:

DRM-free means that the MP3 files you purchase from Amazon.com do not contain any software that will restrict your use of the file.

Prior to digital downloads, consumers almost never encountered DRM-encumbered media. However, the popular iTunes Store from Apple introduced the concept to many users -- often in a surprising manner -- when they tried to do something not allowed by the DRM system, for example, emailing a song to a friend or attempting to play it on an unauthorized device. In both cases, the music wouldn't play.

Amazon's new digital download store offers only DRM-free content, a first for one of the major music retailers.* As the retailer noted: "Every song and album on Amazon MP3 is available exclusively in the MP3 format without digital rights management (DRM) software." That's a positive step for law-abiding consumers, but it also will limit availability of music at Amazon's store. Not every label, major or independent, has seen the light of selling DRM-free tunes. Of the four big labels, Warner Music and Sony BMG still have not decided to abandon DRM.

[* Note that eMusic (site is here) already offers independent, DRM-free music -- for a monthly subscription. The company has said that it offers "2 million tracks from more than 13,000 independent labels spanning every genre of music" and "sells music in the universally compatible MP3 format." While eMusic and its fans will no doubt complain, it is still not a major retail player in terms of market share or consumer awareness.]

Labels hope to limit iTS power with competitors like Amazon 

The success of Apple's iTS took the music industry by surprise. Every other company that had tried to sell digital music made little headway with mainstream consumers, but Apple's popular iPod line, its free iTunes music management software for Mac- and Windows-based PCs, its heavy promotion of gift cards, its relatively light DRM restrictions, and its simple pricing helped make the store popular with consumers. As iPod popularity grew, consumers began to buy more from the iTS. As a result of both time and success, the iTS catalog grew, and international versions of the store were launched. To the labels, it seemed like overnight that Apple had suddenly become a major threat with the apparent power to dictate how they could distribute their content.

From the major record label perspective, the Amazon store represents a real opportunity to slow down the growth -- and power -- of Apple. As such, Universal Music joined EMI -- the only company licensing DRM-free music to Apple (DRM-fee tracks at the iTS debuted in May; read the release here) -- in allowing its content to be sold on the Amazon store without any controlling software. Amazon trumpeted the fact that it had more major label support. According to the release, the Amazon store has the largest DRM-free catalog:

 ...  new digital music download store with Earth's biggest selection of a la carte DRM-free MP3 music downloads. Amazon MP3 has over 2 million songs from more than 180,000 artists represented by over 20,000 major and independent labels.

While the major labels and Apple won't talk about specifics, the implication is clear: The labels are unhappy with Apple's dominance and its refusal to embrace variable pricing. Helping a competitor like Amazon is about trying to level the digital music store playing field.

A good thing for consumers

For consumers, the launch of Amazon MP3 is to be welcomed. Choice is always a good thing, but with digital downloads, choice has never really been available -- only choice of who's DRM ecosystem to be part of (Apple's or Microsoft's). Why is the store so good from a consumer perspective?  Because it offers consumers many benefits, including:

• No technology restrictions on music use. DRM-free MP3s mean that consumers don't have to worry about authorizing PCs or counting the number of CDs that are burned. They can even email files to friends. Of course, sharing music will break copyright laws and the Amazon terms of service, but at least the DRM-free stores like Amazon will put the responsibility on consumers, rather than assume all buyers are potential criminals.
  
  
• Some lower prices than iTS offerings. The Amazon press release noted, "Most songs are priced from 89 cents to 99 cents, with more than 1 million of the 2 million songs priced at 89 cents. The top 100 best-selling songs are 89 cents, unless marked otherwise. Most albums are priced from $5.99 to $9.99. The top 100 best-selling albums are $8.99 or less, unless marked otherwise." Price competition is always in the benefit of the consumer.
  
  
• Browser and operating system independence. Shoppers can use whatever browser they prefer. The only use restriction is that the download tool -- the Amazon MP3 Downloader -- will look for the computer's default browser, so using a non-default browser may impact the experience. Mac users will need the latest version of the operating system (10.4.x), while Windows XP or Vista users can run the Microsoft-specific software. The retailer notes that Linux users can still buy single songs, but that a Linux version of the download tool is "under development."
  
  
• Digital and physical albums in the same place. When an album or an artist's offerings are not available in the DRM-free, digital download form, Amazon offers to sell users a physical CD. While not optimal for the customer who wants to go all digital, the opportunity to buy a CD will do two things: 1) Enable consumers to get any music they want, though they will have to wait for the CD and then rip it to their PC; 2) Help demonstrate to label holdouts that consumers want digital downloads and are willing to pay for them (Amazon will obviously track purchases of physical CDs made off the MP3 store).

By: Tom Rhinelander, NRG Analyst