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Amazon (Nasdaq: AMZN) is in talks with three Hollywood studios about starting a service that would allow consumers to download movies and TV shows for a fee and burn them onto DVDs.
The online retailer is reportedly in talks with Paramount Pictures, Universal Studios and Warner Bros. If the negotiations are successful, Amazon would become a titan in the world of digital downloads, a world where Apple's (Nasdaq: AAPL) iTunes dominates, virtually overnight.
Amazon has a solid track record with its attempts to stake claims in new merchandising realms. The bookseller now peddles everything from jewelry to electronics to magazine subscriptions. Amazon's jewelry sales 
were up more than 100 percent in the fourth quarter of 2005, for instance.
The Internet retailer already sells DVDs and CDs, but digital distribution could leave brick-and-mortar chains with a competitive disadvantage.
Amazon did not return calls seeking comment.
No Shipping or Handling
It's no surprise that Amazon is pursuing digital downloads. Where books require physical handling and shipping, digital downloads do not. A digital deal with the studios would allow Amazon to substantially lower its inventory, shipping and labor costs and avoid returns of movies, said Inside Digital Media Senior Analyst Phil Leigh.
"Ultimately, Amazon's best opportunity is to sell merchandise that doesn't require physical handling," Leigh told the E-Commerce Times. Amazon already sells e-books, but Leigh said the market challenge there is getting people to change the way they read books.
"Digital downloads don't represent a change in the way you watch a movie. It's just a change in the way you get it. That's an important point," Leigh said. "Consider how this service compares to Blockbuster. You are never out of stock. Customers don't have to worry about driving to the store to find out that the movie they want is not there."
Competitive Considerations
Wal-Mart and Target are also reportedly in talks with the studios about digital download services, and video-on-demand movie rental services like MovieBeam and Movielink are enjoying heavy studio investments.
While the studios will be careful not to alienate brick-and-mortar retailers with a digital distribution strategy, analysts said stores like Blockbuster could become obsolete if Amazon, and others, seal deals with Hollywood.
"The studios have an ambivalent relationship with Blockbuster. They are pleased that Blockbuster has raised demand for DVD viewing, but they don't like the revenue split. They don't feel like they are making enough. They would be able to make more with digital downloads because there is no physical handling," Leigh noted.
Battle of Giants
Could Amazon dominate digital downloads leader Apple with such a service? Leigh doesn't think so. However, the push for digital downloads is a recognition by movie studios that iTunes has become a force, he explained, and that force has too much pricing power.
The movie studios are hoping to spread the power in the digital download industry by including Amazon in the mix, Leigh speculated. "The studios don't want any one player to have enough power to control their destiny," he said.
It could be a battle between Amazon and iTunes, though, as the book seller is also reportedly working on a music digital download service as well as an Amazon-branded portable MP3 player that goes head to head with Apple's iPod.
With 55 million customers and a solid infrastructure, Leigh expects digital merchandise to gradually become a major component of Amazon's business model.
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