Analysts expect Amazon.com to roll out digital music distribution by the end of 2006

Citing recent media reports, Merrill Lynch analyst Justin Post said he expects Amazon.com to roll out digital distribution of music, and perhaps also movies, by the end of the year 2006.

A digital music service seems to be the company's "most pressing need," wrote the research analyst in a report Wednesday.

Amazon's launch of digital music distribution services "is a when, not if, proposition," said Post, citing the company's substantial increase in research and development spending and "ongoing pressure" in music sales offline.

Amazon has a large active customer base and profiles, said the analyst, which are "the company’s best assets to launch a compelling service" that can compete with the likes of Apple Computer iTunes, NetFlix, Yahoo! and Amazon's current partner, Audible.

"Initially services could be offered in conjunction with physical purchases, which is consistent with Amazon’s current business model/strategy," said the analyst. "Longer-term, Amazon consumers could increasingly become subscribers, creating a more defensible competitive moat."

Even so, any incremental financial impact from a 2006 launch is expected to be minimal compared to the company's $10 billion in sales.

Longer-term, "a successful subscription offering could help increase Amazon’s total gross margins, while a download model could compress margins," he added.

The analyst maintained a "neutral" rating on Amazon shares. Possibly keeping Amazon stock range-bound in the future is increasing digital media competition from Google, Yahoo!, Microsoft MSN and Time Warner AOL.