AmazonMP3Amazon’s music store has only been in business for a month, and rumors are flying that it’s already the #3 online music seller.

It’s still far behind Apple iTunes, but that might change. One rumor even pegs Amazon passing the second largest download site, eMusic, in revenue by the end of this year.

That leaves companies that don’t have a large online presence in a difficult position. Napster, Wal-Mart, Rhapsody and eMusic are all looking vulnerable and likely to lose out if Amazon’s growth continues.

Besides not DRMing its music, Amazon’s early apparent success can be chalked up to a clean interface, lower prices and most of all, the ability to easily transfer music to the iPod. Arguably, Amazon’s MP3 store has pressured Apple to recently drop prices and increase selection for DRM-free music on iTunes, called iTunes Plus.

Until recently, iTunes was by far the easiest legal way to buy digital music, as users could both buy music through iTunes and sync it effortlessly with their iPods.

Besides Amazon, the major record labels have also begun to test-sell music without DRM this past year, because they’ve had trouble negotiating song prices with Apple. What’s more, the DRM software used by the labels does not play on the iPod directly and none of the labels wanted to switch to Apple’s own DRM software, called Fairplay.

EMI was the first label to sell their catalog without protection and the results from their first quarter experiment have tentatively proven a success. The largest music label, Universal Music Group, followed suit a couple months ago and began selling DRM-free music files in a six month trial.

These four services need to take advantage of the new no-DRM world, or risk elimination:

Emusic1. eMusic
As the self-described number two company in the download business, eMusic surpassed the 150 million download mark recently. The most popular alternative to iTunes as well as most other services, eMusic’s catalog is comprised strictly of independent labels catering to knowledgeable music fans. It’s also
DRM-free. There’s a pattern here. Offerings that are simple (ie. DRM-free) or that are cheap, or both, do well. eMusic’s success shows that when the price is right (at $9.95 for 70 songs per month) and the music iPod compatible, digital download services can even flourish without major labels. Another success of eMusic is how it couples an intuitive web-based interface with insightful editorial content to guide users.

Beside the lack of major labels, eMusic gets negative marks for letting labels periodically drop out of the collection (when they decide the compensation is insufficient) as well as the service being shoe-horned into a subscription-based format that’s increasingly losing out to the pay-as-you-go model. Despite these shortcomings, Emusic is currently head and shoulders above the other offerings. It’s future is harder to predict, given its unconventional model, but eMusic provides the most comprehensive and gratifying user experience for the serious music lover.

Rhapsody2. Rhapsody
By selling its resounding failure of a service, URGE, and merging with Rhapsody, MTV has finally positioned itself in the role it knows best – advertising. With Rhapsody, MTV may be able to take advantage of its brand with a service worth promoting. While the Rhapsody software allows nice music management (for PCs only), Rhapsody’s website is far more crucial to its success. It’s generally intuitive and wide-ranging but still requires users to download software to stream music from the site.

Rhapsody is also tentatively throwing itself into the DRM-free market with select offerings from Universal artists. Along with the push in publicity for the service, Rhapsody offers files compatible with iPods and is beginning to branch out into the cellphone music business with Verizon. These are all good signs for future success for the service, but currently the company is too busy trying to sell its niche Rhapsody-to-Go subscription service and undersells its compatibility with iPods.

Walmart3. Walmart
Walmart began advertising DRM-free downloads a couple months ago, also with the intention to undercut Apple’s standard prices – the same selling point as when the Walmart first entered the digital download industry. The first sell doesn’t to appear to have worked, but Walmart is nothing if not persistent, and really big. They do annoying things like only offering edited versions of their music, a practice that might as well render popular genres like hip-hop useless.

Although Walmart’s service has often been described as sterile, more noteworthy is that it forces users to shop with DRM-afflicted preview clips even for DRM-free music. If Walmart’s online store is expected to blossom in an iPod-dominant market, the service’s interface will need to be re-hauled from the ground up to reflect it. Currently the site is unhelpful at best and aggravating the rest of the time. Without serious changes, Walmart will maintain its dominance as a price leader, without leading anything else.

Napster4. Napster
The web-based service allows streaming of music for even non-subscribers, but has few other positive aspects worth mentioning, so we’ll focus on the negative. The site is stripped-down and offers few editorial notes to help discover new music and nothing beyond mere lists of artists as “recommendations.” Napster is actually clunkier than Walmart’s bare interface and is nowhere near as cost effective, considering the DRM restrictions. Perhaps the most damning aspect of the service is the frequent note found when attempting to buy music – “Napster is not compatible with the iPod.” For a company that’s already been killed off once before, this zombie will most likely get sawed apart.