Amazon: The Avis of digital music

The online retailer is a distant second to Apple, but a deal with MySpace could move Amazon up the charts.

Amazon: The Avis of digital music 1It was easy to scoff two years ago when word leaked out that Amazon was launching its own digital music service. The Seattle-based online retailer wasn’t just mulling an iTunes-like download store – it was supposedly drawing up plans for a branded iPod-like device.

But Amazon CEO Jeff Bezos had a much better plan for a digital music offering than his naysayers realized. Ten months after its debut, Amazon (AMZN, Fortune 500) has overtaken competitors like walmart" rel="nofollow" target="_blank">Wal-Mart (WMT, Fortune 500) and RealNetworks’ (RNWK) Rhapsody to become the second biggest online store after iTunes, according to market research firm NPD. Now two music industry sources tell Fortune that Amazon is talking to MySpace (NWS, Fortune 500) about becoming the social networking giant’s download store partner when it rolls out its highly anticipated joint venture with Universal, Warner Music and SonyBMG in September.

MySpace and Amazon declined to comment on any pending deal.

Amazon still trails Apple by a huge margin. NPD doesn’t release detailed market-share data, but Russ Crupnick, the firm’s senior entertainment industry analyst, says iTunes still controls more then three-quarters of the Internet music store market. By contrast, Amazon’s market share is in the single digits. “There is a tremendous gap between number one and number two,” he says.

Amazon: The Avis of digital music 2Even so, Amazon may have a better chance of chipping away Apple’s (AAPL, Fortune 500) dominance than any of its other rivals. MySpace plans to let its 120 million users stream entire songs before downloading them for a yet-to-be-specified price. That could be a powerful sales tool for Amazon. Why go to iTunes to purchase the Justin Timberlake song you just heard on MySpace when you can buy it instantly with one click, courtesy of Amazon?

How did Amazon wind up in such a promising position after less than a year in the digital music business? Well, for one thing, it scrapped whatever plans it may have had for a branded-MP3 player. How many people do you know who would have ditched their beloved iPod for what industry wags referred to as the aPod. Sure, we all shop at Amazon. But it doesn’t have Apple’s cool factor. (Amazon, it should be noted, did go ahead with the Kindle, its oddly named wireless book reading gadget.)

Amazon: The Avis of digital music 3