Apple Inc.'s decision to sell DRM-free downloads from EMI and indie labels in the AAC format rather than the MP3 format is creating new strategic opportunities for both rival device manufacturers and digital retailers.

Come May when iTunes launches DRM-free support, a number of devices that have been shut out of Apple's ecosystem will suddenly have compatibility with DRM-free content purchased from the store. Among them are: Microsoft's Zune, SanDisk's Sansa, Sonos' digital living room solution and a number of Sony devices including PlayStation 3, and the Walkman S series of MP3 players. Likewise, select music phones from Nokia, Motorola, Samsung, and Sony Ericsson support the format.

Moving forward, competitors of the iPod are expected to start adopting support for AAC in greater numbers in order to gain additional access to consumers who purchase music through iTunes, which claims upwards of 70% market share in the a la carte downloads business.

But less than 10% of the digital music players in the market currently support AAC, according to digital music retailer estimates. And meeting the level of penetration that MP3 currently enjoys--support by tens of thousands of devices--will require years of catch up.

In the meantime, some of Apple's retail challengers think they have a chance to use iTunes ongoing AAC support against if they can strike similar agreements with EMI and adopt the MP3 format. "I think it leaves another great opening in the market for all the other retailers, ourselves included, to offer MP3, which is still the only universally compatible file in the world," says David Pakman president/CEO of eMusic.

Of course, other digital retailers first will have to first announce support for DRM-free music and negotiate licensing deals with EMI, the indies and others to allow for such distribution.

Microsoft says it is exploring moving in a DRM-free direction with its partners, as does Real Networks. CEO Rob Glaser said in a statement, "We look forward to working with EMI and the rest of the music industry to bring DRM-free, interoperable music to consumers in the months ahead."

One group that is not likely to be immediately mobilized is would-be retailers like Amazon who have been sitting on the sidelines of the digital music market waiting for the interoperability issue to resolve itself.

While EMI's decision to drop DRM is a step in the right direction it's not a tipping point that will push them into the market. Merchants already in the market say any company with designs on offering major label content won't launch a new service with just music from EMI.

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