Barnes & Noble? Tower Records? Buggy-whip makers? Amazon (AMZN) feels your pain.
A decade after Amazon’s explosive entrance into book and music retailing dented big media retailers and put smaller ones out of business, Amazon is getting a taste of its own disruption. As we’ve noted, and as the New York Times points out, Amazon’s share of the music retailing market is declining as its customers go digital. And threats to its fat-margin DVD and books businesses can’t be far behind.
Amazon has redoubled its efforts in digital distribution in recent years (see its MP3 store, movie-download service Unbox, and the Kindle). But, at least in music, Amazon’s embryonic digital growth can’t offset the decline in physical sales, in part because many (most?) music “customers” don’t pay for the digital version. And for the customers that do, Amazon still badly trails the company that caught it asleep at the digital switch, Apple (AAPL).
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 centres 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 (WMT) 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.
Amazon’s current loss of share in music, by the way, is its own fault. It should have owned digital music. Amazon went to sleep in the early years of this decade, and by the time it woke up, Apple had already vaulted past it in digital sales. Amazon may now be making some headway against Apple–and as its DRM-free story gains traction, it will probably make more–but this likely won’t stop its current music and DVD business from being badly disrupted over the next few years.
In books, Amazon is probably safe for a while: Having learned from its mistake in music, Amazon is at the forefront of digital books, and the digital book revolution will probably be slower than the one in music.
But make no mistake: With more than $9 billion of global revenue (60%+) exposed to the shift from physical to digital media consumption, Amazon is now in the path of the same disruption steamroller that allowed it to flatten many physical-world retailers a decade ago. A new “sense of urgency” in digital should help, but like many of its now-defunct retailing competitors, Amazon is now an incumbent behemoth with a legacy business to protect.
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