Leading dot.coms see upside to downloads

DSN Retailing Today, March 5, 2001 by Molly Prior

NATIONWIDE DSN REPORT -- When the anti-Napster contingency foretold the premature demise of digital downloads, they obviously weren't in tune with today's techno-savvy consumer. If anything, digital Web delivery is an industry on the verge of explosive growth, and in the interest of meeting the needs of young consumers who read Steven King novels on their PDAs or listen to digital music on their MP3 players. Internet retailers such as Walmart.com and Amazon.com are rushing to alter their merchandise mix to provide downloadable software, books, music and more.

Walmart.com was one of the first broad-line discounters to respond to the trend. The retail giant entered the digital download category in February when it partnered with RealNetworks to provide audio streaming to its on-line music store. Visitors can listen to 30-second RealAudio samples of every song on every CD in Walmart.com's inventory. Despite its reliance on downloading technology, though, the system is designed to foster the sale of conventional CDs.

Bringing downloadable music to the masses is hardly new. Amazon.com entered the downloadable music category two years ago and extended its digital media initiative in February with the launch of its Software Downloads store. The store, currently featuring a host of tax-help titles, including Inuit's TurboTax, allows customers to purchase popular software titles and download them directly to their computers.

Besides giving procrastinators one last hope of filing their tax forms in time, the downloads offer consumers convenience. "Convenience is the No. 1 driver," said an Amazon spokesman. "Folks can get the product pretty much instantaneously--within a matter of minutes or hours, depending on their modem." He added, "The store, like all of our stores, is consumer driven. Consumers requested it, so we proactively jumped in and got it going." Amazon has partnered with technology vendor Ingram Micro and Preview Systems' software distribution platform to operate the store. While Amazon would not disclose the method of payment to Ingram Micro and Preview Systems, a spokesman described it as a typical retail scenario.

The entrance of e-books and downloadable music has paved the way for software downloads. E-Book store traffic continues to grow as Amazon adds more titles. Publishers, understanding both the cost savings potential and promotional opportunities, are aggressively entering the e-books category and, in some cases, are offering titles electronically before the print version hits retail shelves. In July, Stephen King chose to debut chapters of his new book "The Planet" on Amazon. Consumers could purchase one or all of the three installments for $1 each. Amazon enjoyed great success with the novel.

Amazon launched its e-Books store Nov. 14 after signing a deal with Microsoft. Barnes & Noble launched its e-book publishing division on Jan. 4 with the creation of Barnes & Noble Digital. The first selection of e-book titles will be available for sale this spring. However, due to copyright law and technological limitations, neither Amazon nor Barnes & Noble customers have the option of printing the e-books or downloading them to hand-held devices.

While several technology issues still need to be addressed, e-tailers believe the digital downloads will represent a bigger piece of the market as faster modems and broadband technology become widespread. And as book and software publishers begin to see the economic advantage of downloadables, the price of e-books and software may drop, passing the savings onto retailers. Retailers able to forgo warehousing and shipping costs can then pass those savings along to consumers.

A new survey by Arthur Andersen revealed the high cost of e-books and the hardware required to view them may stunt the potential growth of the market. Over 75% of survey respondents said they expect to pay less than or equal to the price of a paperback. Those expectations may spill over to downloadable software titles as well.

However, publishers have the ability to offer value-added extras such as another chapter or short story to appease consumers' concern for price.

Peggy Smyth of Arthur Andersen said 10% of people who responded to the study had purchased or received an e-book in the last year. "That is significant because the technology is only about two years old, and there are not that many e-books available. Over the next three years, depending on the pricing, there will be a big change in the market," said Smyth. "The current 10% will double or triple in a relatively short period of time."

While e-books may offer e-tailers a sneak peak into the future of downloadable software, music set the whole downloadable media trend in motion. And e-tailers like Amazon and Barnes & Noble have managed to skirt copyright issues surrounding Napster by marketing free downloads to record labels as a promotional tool.

In April of 1999, Amazon offered a free full-length Sarah McLachlan track. The move marked the first time an online retailer worked with a major recording artist and record label to offer a free full-length download. An Amazon spokeswoman said it sparked labels to begin using digital downloads as a promotional tool. The return for artist and record labels is great.