Last mogul cries uncle!

Business Week reports rumors that Sony BMG will finally face the inevitable, joining its three major competitors in offering DRM-free music. In case we might have forgotten, the BW report also reminds us of Sony’s sorry history of auto-installing stealth software back in 2005.

This marks the end of what most (all but the vendors) would consider an unfortunate experiment in copy protection and restricting the actions of the most honest customers.

However, just being a rumor, the report doesn’t say whether Sony BMG will eventually be going with iTunes Store or trying to punish Apple (for enforcing its own vision for industry downloads). BW implies the Sony announcement will come with the Pepsi/Amazon free (billion song) download promotion that begins with the Super Bowl on Feb. 3. (By comparison, Apple hit 3 billion downloads last summer, and presumably is already past 4 billion.)

Giving away a billion songs free will certainly increase the installed base for Amazon’s MP3 service. This is a big bet by the labels — presumably hundreds of millions of dollars in foregone profits — all to establish a single credible rival to Apple, while not helping any of the other Apple rivals.

There’s one thing I don’t quite get, however. The original dispute between Apple and the record labels was over price — the labels wanted to charge more than Apple’s flat 99¢ for some tunes, specifically hot new tunes from the most popular artists. But Amazon also charges 99¢ for its tunes, except for the hottest 100 new tunes where it charges less (i.e. 89¢).

This plan only makes sense if the labels will make more from Amazon in the long run. Is Amazon paying more than Apple today? Given that Apple makes almost no money off downloads, this seems unlikely. Will Amazon charge more down the road? That would be my suspicion, but as long as Apple is the dominant player Amazon would be unable to charge higher prices than Apple (and in fact is forced to charge lower prices).

So my guess is that the only reason for building up Amazon is to have the credible threat (exercised or not) to cut off Apple unless it renegotiates its contracts. Realistically, I think the industry is wasting their time unless the industry can fragment digital downloads into at least three major player — all with between 20% (enough to be credible) and less than 40% (not enough to be dominant). If I were an executive on Hollywood Boulevard, I would concentrate my efforts on making sure iTunes alternatives catch on in other countries.

Photo credit: iconic Capitol Records building in Hollywood, from Wikipedia.