Consumers so rarely get a peek into how deals are made in the retail sector, so this farewell note from the man who helped head up Amazon.com’s digital music division, and the conversation surrounding it, is eye-opening. Scott Ambrose Reilly made deals with the music labels for Amazon’s MP3 download service, which has come to be a real competitor to Apple’s iTunes. 

I am particularly proud of the last 3½ years at Amazon. 11.5 million tracks available in six countries. All DRM-free which they said couldn’t be done just three years ago. How can I not be proud of the Daily Deal that has been so successful it riled the Cupertino beast?

The story Reilly refers to was reported in Billboard last month.

In exchange for a Daily Deal promotion on a new album, Amazon has been asking labels to provide it with a one-day exclusive before street date and such digital marketing support as a banner ad on an artist’s MySpace page and messages on label and artist Web sites and social network feeds.

Apple didn’t like these deals and took advantage of its muscle as the market leader, pulling marketing on iTunes for albums that were featured in this way on Amazon. The result? Bullied record companies decided it was no longer in their best interest to participate in Amazon’s program. Apple is the winner, but there are more losers here than just Amazon. The consumer loses, because he could have gotten an album early and at a great price. And the artist loses, too, as Billboard notes.

One of the few albums to participate in an early-street-date Daily Deal promotion so far this year is Vampire Weekend’s “Contra,” which Amazon made available for $3.99 Jan. 11, a day before it was available anywhere else. The promotion played an obvious role in powering the album’s No. 1 debut on the Billboard 200, with first-week U.S. sales of 124,000, of which 60% were digital downloads, according to Nielsen SoundScan.

One wonders if this scuffle is the reason Amazon’s Reilly included these sentences in his leave-taking:

Most of you have made this journey memorable, introduced me to some great music, allowed me to try some cockamamie schemes, made a few bold bets and I will miss the characters that make up the music business. A few of you have been a total pain in the ass and really should think about trying to make this business a better place once in awhile. Maybe listen to Elvis’ “If I Can Dream” on your way into the office. The music business and the world could use more positive energy. 

Apple is in the news right now, of course, because it recently started selling its iPad. Some claim this tablet is a revolutionary device. I’m not so certain, but I do know it’s already changed one marketplace. It’s made eBooks more expensive—and not just for iPad readers. Apple has let publishers set the prices for their books in its iBooks store, whereas Amazon has always offered Amazon-set discounted prices in its own store. Popular Amazon Kindle eBooks tend to be around $9.99 for new releases. New York Times bestsellers have been almost always that price, while some books have been sold for even less—popular Swedish thriller The Girl with the Dragon Tattoo is going for just $5.50. But publishers didn’t like ceding control over pricing. You might notice that books are one of the few consumer products that have a list price printed right on the item. It’s not that publishers were making a smaller amount of money; Amazon paid the same price to publishers for its eBooks, no matter what it charged the customer. Still, publishers felt that low prices were devaluing eBooks, but there wasn’t much they could do about it while Amazon had such a large share of the marketplace. The arrival of the iPad—and the idea that behemoth Apple might be the one company that could mount a serious challenge to Amazon in this area—changed all that. Publishers got the deal they wanted with Apple and set their own prices—even though this actually means less revenue for them. They then told Amazon they’d have to settle for the same deal. Amazon at first balked, making all books published by Macmillan unavailable on the site, eBook and hard copy versions. But they noted that publishers had a “monopoly” on their own titles and they couldn’t hold out forever if they wanted to continue selling books. So Amazon capitulated:

Under Macmillan’s new terms, which take effect at the beginning of March, the publisher will set the consumer price of each book and the online retailer will serve as an agent and take a 30 percent commission. E-book editions of most newly released adult general fiction and nonfiction will cost $12.99 to $14.99.

Those terms mirror conditions that five of the six largest publishers — Hachette Book Group, HarperCollins Publishers, Macmillan, Penguin Group and Simon & Schuster — agreed to with Apple last week for e-books sold via the iBookstore for the iPad.

The result is higher prices for some eBooks sold for Amazon’s Kindle. As an example, I bought Hilary Mantel’s Booker Prize-winning novel Wolf Hall for my Kindle in December; it cost $8.80. Now the Kindle edition of Wolf Hall sells for $12.99. Amazon wants customers to know that it’s not responsible for higher prices, though. It cleverly puts a notice under the number: “This price was set by the publisher.”

Poor Reilly might not be done doing battle with the forces of Apple just yet—he left Amazon’s digital music division for its Kindle division.