How Amazon is beating the costs of shipping

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By Miguel Helft

(IDG) -- Dave Tainer may be 37, but he still digs the Sex Pistols classic, "God Save the Queen." "This song is life," he wrote in an online review after discovering a new cover of the punk-rock anthem by the group Motorhead. Tainer wasn't knocking around on Napster or Gnutella when he downloaded this anti-establishment screed for free. He was on Amazon.com.

While the spotlight has lately focused on the travails of Napster and the major labels' struggle to develop a profitable way to distribute music online, Amazon quietly launched its Worldwide Digital Group in March. It offers free music downloads as well as paid downloads of 4,300 e-books and hundreds of software titles.

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In the world of digital books and music, Amazon will face off with such giants as AOL Time Warner, Barnes Noble and Bertelsmann. (AOL Time Warner is the parent company of CNN.com.) But the Internet's biggest store already has an edge: its 30 million shoppers. "They are consistently one of the top download sites," says Matt Smith, a VP at Liquid Audio, which powers downloads at sites such as Yahoo! and Tower Records. (Amazon would not disclose how many downloads it gets.) Smith adds that Amazon has surpassed the competition in integrating its downloads into its store, with reviews and top 10 lists. Those features certainly helped make the Dalai Lama's otherwise obscure religious chant "Green Tara Mantra" Amazon's No. 1 "indie" download in May.

"Our role is to help people discover music," says Jeff Bezos, Amazon CEO.

While the debate rages about the best models for music and e-book sales, Amazon is forging ahead with its hybrid approach: free music, and books and software for a fee. Jeff Blackburn, head of Amazon's digital division, brushes aside any discussion of whether and how music customers will pay for downloads as largely irrelevant to the task he faces. In his quest to build the ultimate digital mall, he's ready to use any platform -- whether Adobe or Microsoft's e-book format, for example -- and business model that will work. "We have a pretty pragmatic view of it," he says.

The digital unit will not pull Amazon out of its financial hole. But it is already helping in small ways. Free music downloads, notes Blackburn, have proved a powerful marketing tool, boosting sales of certain CDs by as much as 100 percent. "When we've done promotions with Amazon, the results have been spectacular," echoes Jay Samit, a senior VP at EMI.

Finding the right balance between the digital and physical may prove key to making downloads profitable. Amazon could bundle special digital offerings with the purchase of a CD, Blackburn suggests. Customers might pay extra, for instance, for a version of Madonna's latest album that's accompanied by four immediately downloadable tracks, he adds. As an online retailer, Amazon is well-positioned to do this, while its publishing rivals are not.

In the meantime, Amazon is already drawing music-download customers who are reluctant to go elsewhere. Tainer never felt secure trying Napster, but he says he's sure he'll return to Amazon. There are a lot more punk-rock memories he's looking to bring back to life.