Is Amazon Losing Its Edge as a Media Retailer?

Amazon’s (s amzn) success as an online retailer is the stuff that entrepreneurial dreams are made of. In 15 years, Amazon has defined and continued to shape how we shop online — especially for media like books, movies and music. The company controls 8 percent of media sales, whether online or in stores. Wal-Mart (s wmt), by contrast, controls 7.7 percent of all retails categories. So Amazon has emerged as the Wal-Mart of media retail.

But as opposed to printed pages and plastic disks, media is increasingly being consumed in the cloud. And there, from a media sales perspective, Amazon is finding much less success.

According to NPD Group, Amazon controls just 12 percent of the market for Mp3 sales, roughly one-sixth of Apple’s (s aapl) 70 percent share. True, Amazon is growing that share, mostly at the expense of smaller rivals like Rhapsody. But it has yet to put a dent in Apple’s dominance.

And thanks to portable, cloud-friendly devices like smartphones and iPads, Amazon is up against tougher competition in movies and books as well. Netflix’s (s nflx) subscription-based iPad app is a much more immersive and intuitive movie experience than downloading a movie from Amazon’s site. Kindle, meanwhile, seems destined to become a niche e-reader. The iPad dulled Kindle’s status as a must-have device. Instead, Kindle’s best hope is as an e-reader app on tablets, where it must compete with iBooks, Nook and scores of other e-book options.

Sales from its media business is central to Amazon’s business model. But media revenue in North America rose 11 percent last year to $6 billion, while sales of electronics and other non-media merchandise grew 43 percent to $6.3 billion. So even though non-media revenue was larger than media revenue, it was still growing four times as fast. In the first quarter of 2010, the trend continued: Media revenue increased 22 percent while non-media grew by 73 percent.

To be clear, Amazon isn’t in danger of being the next Yahoo (s yhoo) — a tech giant that lost its way and can’t find it back even with a sharp CEO at the helm. Amazon’s flagship retail site is still the biggest online retailer, and continues to expand its share of the global retail market. It will sell plenty of e-books and Mp3s. And Amazon will remain a crucial player in determining how companies, startups in particular, tap into the cloud for their operations.

But it’s Amazon’s early and deep expertise in cloud computing that makes all the more puzzling its lackluster performance in cloud-based media. Amazon should have been the leading retailer of cloud-streamed media, but instead it’s handing that over to companies that write the OS for the most popular cloud-based devices, companies like Apple and even Google (s goog), which may not sell digital media but will try to sell ads on top of it. And that’s a pretty big missed opportunity.

What could Amazon do? Aggressive, smart acquisitions could help — Amazon has $5 billion in cash and marketable securities. But in some cases, its hands are tied. It’s long been suggested — and frequently rumored — that Amazon buy Netflix. It would be a strong fit except that it would open Amazon up to sales taxes in states where Netflix operates. Amazon could also simply rely on its core market of selling printed books, CDs and DVDs. It’s still a big market, but it’s also dangerous to peg your future sales on media formats that are becoming less popular by the day.