Amazon (NASDAQ:AMZN) made another push for its ecosystem by launching an optimized version of Amazon MP3 store for the iPhone and iPod touch.  The service provides iOS users access to Amazon’s catalog of approximately 22 million songs or 2 million albums through the Safari web browsers on iOS devices.
Amazon’s aggressive pricing through deals like albums for $5, songs for $0.69 could result in the company capturing a significant share of ~$2.4 billion sales that Apple (NASDAQ:AAPL) generates through mp3 sales on its iTunes service. Songs/albums purchased on Amazon MP3 store can then be stored for free on Amazon Cloud Player accounts resulting in a ubiquitous presence matching that of iTunes. We believe that a successful push to the Amazon MP3 store could provide a significant upside to the ~$60 billion in annual revenues that Amazon earns currently.
The online retailing giant uses the mobile site structure for the service to sidestep the ~30% fee structure Apple has for in-app purchases. The clever ploy will help Amazon maintain its current level of margins while expanding its target market to include the millions of iPod and iPhone users. 
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Pricing Strategy To Be The Key
Apple offers three pricing tiers: $0.69, $0.99 and $1.29 for a song. In contrast, Amazon offers a significant music selection for free while prices vary from $0.69 and above for a song.   The costs for purchasing a music album can also be significantly lower on Amazon. For example, music album for the new release Les Miserables costs almost $1.5 less on Amazon than on Apple’s iTunes store.
Ubiquitous Presence Of Purchase At No Added Costs
Besides the pricing advantage a user would enjoy if he chooses to purchase a song from Amazon, he/she also gets to access his songs through the Amazon Cloud Player. The Amazon Cloud Player supports music streaming on a variety of devices such as iPhones, iPads, iPods, Kindle Fire, Android phones tablets, Sonos, Roku, or any web browser. The songs purchased on Amazon Mp3 store would be added to the Cloud Player playlist at no additional charge and would not count against the limit on number of songs permitted to be store.
Apple May Not Mind Losing On The iTunes Business
The ubiquitous availability of the songs purchased, low prices and free streaming and storage services support our belief that Amazon could make a substantial dent in the approximately $2.4 billion Apple generates annually from mp3 sales on Apple iTunes in 2013. The iTunes business contributes 1% to our $700 price estimate for Apple and we don’t expect it to be bothered by the loss of a small segment of iTunes sales. However, Amazon successfully capturing half of the business by 2013 could result in a 2% upside to the ~$60 billion in annual revenues the company earns currently.
We have a $218 estimate for Amazon which is 20% below the current market price.Notes:
- Amazon MP3 Store Now Optimized For iPhone And iPod Touch, Amazon, January 2013 [↩]
- Amazon MP3 Store Comes to iOS — Without the In-App Purchase Tax, Wired, January 2012 [↩]
- Mp3 Songs $0-$0.01, Amazon, January 2013 [↩]
- MP3 Download-2012 Editor’s Picks, Amazon, January 2013 [↩]