Amazon faces new threats in music

Barnesandnoble.com's entry comes two months after Buy.com and Virgin Megastores launched their own online stores. It also follows the relaunch of the CDnow site after the company's merger with N2K.

Not only are big sites such as Barnesandnoble.com and Buy.com broadening their offerings to include music, but smaller niche sites also are likely to arise soon to cater to aficionados of specific types of music, said Geoffrey Bock, an analyst with the Patricia Seybold Group.

In the meantime, Barnesandnoble.com's entry and its deep discounts on music could spark a price war for music online, International Data Corporation analyst Jill Frankle said. If that happens, she said, firms will need to spend more on marketing, which will raise costs and shrink profits.

That means Amazon will have to continue to innovate and to outmarket the competition to maintain its lead, Bock said. And as the market continues to segment, he added, Amazon might need to target some of the more profitable music niches.

Amazon launched its online music store in June 1998 and sold nearly as much music in six months as former leader CDnow sold in the entire year. Amazon has not broken down sales figures for music this year but continues to claim that it is the leading online music store.

Because the online music business is still young, new sites are likely to have the opportunity to steal both sales and market share from Amazon and other established players.

The prospects of Amazon and Barnesandnoble.com will depend on how well they execute their strategies, Frankle said. Because many sites sell similar products and look alike, she said, retailers will need to find ways to set themselves apart--including, for example, offering incentives for frequent buyers to entice them to return.

In addition, Barnesandnoble.com could distinguish itself by using its bricks-and-mortar Barnes & Noble stores to target those customers not yet online, said e-commerce analyst David Cooperstein of Forrester Research. Amazon could suffer by not having that sort of hybrid strategy, he said.

Barnes & Noble needs "some way to touch those households that are not going online to buy, which is still 80 or 90 percent of households," he said.

Even so, Cooperstein cautioned, Barnesandnoble.com might not be the player to capitalize on Amazon's weakness: It is late to the online music space, and music is not a big component of its bricks-and-mortar sales, which could hurt the company's online music efforts.

"They're sort of climbing an uphill battle," he added.

The next phase of that fight will involve new technologies such as the controversial MP3 music format for digital downloads, as well as customizable CDs, Frankle said, adding: "I think there's a lot more poised to happen in the music arena."