Tesco Digital will launch next month, offering 3.3m songs with plans to add TV shows and computer games. By the end of the year, it will be compatible with iPods and other MP3 players.
The retailer already sells music via but tracks can only available in Windows Media, meaning they can't be played on iTunes or iPods.
Costs of track and album downloads have not been released yet, but reports say that they will be "competitively priced". Apple is meant to be dropping the price of tracks sold through its iTunes service after complaints that the UK price was higher than in other EU territories, but is still charging 79p a download.
Graham Harris, commercial director at Tesco, said: "The new Tesco Digital site is more than a music download portal -- we wanted to create an exciting and easy-to-use entertainment shop that Tesco customers of all ages and technical ability can use and trust. We're starting out with a comprehensive music offering, but customers can expect downloadable TV and films as well as games to buy very soon."
The move will be a blow not just to iTunes, but other online music services such as , and . As Tesco expands its offering beyond traditional groceries, it tends to have a serious impact on rivals. Boots the Chemist has been hurt by Tesco's move into pharmacy as well as its success in retailing toiletries. The book trade is affected by Tesco's ability to negotiate huge discounts with publishers and sell titles cheaply.
Separately, Tesco published its preliminary results today, saying that sales for the year ending February 23 were up by 11.1% to £51.8bn, and group pre-tax profit was up by 5.7% to £2.8bn.
Sir Terry Leahy, Tesco chief executive, said: "We begin the new financial year confidently -- with a good start in the UK, excellent progress in our established international markets and promising early performance from our investments in future growth, particularly in the US, China and Turkey."