Our take...
For paid music, Tesco faces competition from established online music stores in the UK, dominated by Apple's iTS. On one hand, iTS' success in selling content has been driven by the store's tight marriage with companion Apple-branded devices, including the line of iPods and the iPhone. While DRM-free tracks from Tesco Digital and other stores outside of iTS will play back on Apple hardware, these competitors have traditionally struggled to persuade large numbers of Apple hardware owners and iTS shoppers to break out of the Apple ecosystem. Furthermore, the current lack of hardware integrated with Tesco Digital to enable users to easily watch video on, for example, the lounge TV, is likely to hold back sales of paid video in the future.

Beyond Apple, Tesco Digital also faces rivalry from other online music stores offering DRM-free music a la carte: Amazon (due to launch a music store with DRM-free tracks from major labels by year-end 2008), 7Digital (2.8m DRM-free tracks, including majors EMI, Warner Music), Play.com (1.3m DRM-free tracks, including major EMI).

The more serious move into digital content distribution complements Tesco's expansion into packaged media retail and longer term strategy of extending its product line to situate itself as an "all-in-one" retailer, beyond food. The supermarket may be prepared to undercut rival digital download store prices to attract usage and perhaps promote digital content as a loss leader to boost sales of higher value products, such as electronics and furniture. Any content pricing strategy will be developed to support the reputation of the supermarket as offering consumers good value for money. Nonetheless, the store is unlikely to attract dedicated music fans who are more likely to stick to more specialist online music stores; rather Tesco Digital will target more opportunistic and impulsive buyers visiting the Tesco site, much as CDs in the supermarket's high-street stores are positioned to attract passer-by shoppers.

The news also reflects a wider trend by the major labels to undermine Apple's dominance in the paid online music market by licensing catalogues DRM-free to rival services. At present, iTS in the UK only offers tracks from the EMI label DRM-free; other major labels - such as Warner Music that has signed DRM-free music to 7Digital - have resisted signing a deal with Apple for fear of giving the firm too much sway in setting wholesale pricing and retail pricing strategy.