It started off simply enough: Tesco was a place to buy your groceries. Now it delivers everything from mobile phones and broadband to legal services and insurance.

But the supermarket giant is about to take a major step into one of the most aggressive retail markets of the 21st century. Yesterday it declared war on Apple for a share of the booming market for music, movie and games downloads.

It did so after setting up shop in every Scottish postcode area and launching one of the most ambitious international expansions in retail history.

Tesco - which yesterday posted pre-tax profits of £2.85bn - aims to challenge the established leader in downloads, iTunes, and pin back smaller rivals such as Woolworths, 7Digital and HMV.com. In doing so, retail experts said, it could slash the cost of electronic entertainment and cement its iron grip on how - and how many - Britons shop.

The "shake-up" - as Graham Harris, Tesco's commercial director called it - starts next month. The supermarket's website will start selling music downloads that are compatible with Apple's iPod. That's pretty important: roughly three out of every four mp3 players sold are iPods and seven out of 10 music downloads are made through iTunes.

Mr Harris said: "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. Music is just the start - it really is a case of watch this space."

Tesco has seen just how vulnerable the traditional market for recorded music is. Earlier this month iTunes overtook American supermarket Wal-Mart (the owner of Asda) as the biggest music seller. Wal-Mart, to be fair, has entered the download market, but has seen sales of CDs dip as online music takes off. In the UK last year download sales grew 40%.

Most industry watchers believe the day of the CD, the CD game and the DVD is coming to an end. Some believe entertainment downloaded from the internet is growing by 25% a month. A few worried engineers have even warned that the launch of new technology, such as the BBC iPlayer used to download and view TV on demand, is stretching the capacity of the internet to its limits. The trick, for Tesco, is to get in on the download market sooner rather than later.

The biggest losers could be the High Street music stores. Virgin has already sold up to its own managers (who have reinvented the old Virgin Megastores as Zavvi).

HMV is working hard online, but like Zavvi, can't sell songs that can be played on an iPod. Traditional music stores in the past have had the winning hand over the supermarkets, which only stocked the most popular films, games and music. Not any more. Several, including Fopp and Music Zone, have collapsed.

"This makes a lot of sense for Tesco," said Paul Freathy, a professor of retail studies at Stirling University. "They used to be taking a risk when they stocked CDs. Either they wouldn't have enough and they would stock out or - just as bad - they would be stuck with something that was out of date or out of fashion. This is never going to happen with a download, which is simply stored on a mainframe somewhere."

Tesco's catalogue has already mushroomed. Rather than a few dozen titles in store, it now offers 3.3million tracks. From next month some 1.6million will be able to be played on an iPod. By the end of the year they all will.

So what will Tesco bring to the music market? The firm has still to say how much it will charge for downloads, which are substantially dearer in Britain than in, say, the US. Tesco would only hint that the products would be "competitively priced".

The firm already sells downloads, although they are only available to play on PCs using Windows Media, at 79p a song, about the UK average price for iPod-compatible tracks. Wal-Mart is already undercutting iTunes in the States, by around five cents a track. How low can the cost of a song go? One site in Russia got the cost of a downloaded track down to three cents, although it stumbled into legal difficulties. Some bands are effectively giving their music away, cashing in on concerts and merchandise instead. Radiohead last year offered its new album online, bypassing traditional labels, in return for a donation.

Prof Freathy, meanwhile, reckons the big multiples like Tesco will be well placed to lure buyers away from the likes of iTunes. Look out, he said, for "buy one, get one free" offers and loyalty points as well as lower prices. "They might say, for example, that you've bought so many downloads from us, so you can have, say, a free set of headphones," he said.

Tesco is well placed to apply the same skills that have brought it supermarket dominance to the online music market.

Apple is far from out of the game. So far it has seen off Wal-Mart in the US. Crucially, when it sells music through iTunes it does so using exactly the same software that the iPod uses. Apple too has the bigger catalogue: some six million music tracks for sale as well as free downloads of everything from video news clips to audio podcasts. By January this year iTunes had sold four billion tracks, up from three billion just six months before.

What will the music market bring to Tesco? Well, customers. Most age groups have grasped the joys of downloading their favourite songs; Led Zeppelin fan Prof Freathy can pick the track or two he likes best rather than the whole album. But the young are particularly keen. "Downloads appeal to young people," Prof Freathy said. "We talk about lifetime customer loyalty."

Tesco has already used the internet to expand way beyond its traditional grocery business. It sells everything from equestrian equipment and holidays to home insurance and furniture.

The giant's theory is simple: get teenagers online. Right now they might be buying downloads. Give it a few years and they might be ordering their groceries; give it a decade and they might be buying their first house. And all through Tesco.com.


Listeners' guide to big four stores


iTunes
Catalogue 6 million plus tracks
Price 79p per track
The world's largest online music store. Movies, ringtones and 250 free internet radio stations have recently been added to the near comprehensive catalogue. Downloaded files can only be played on Apple's iPods and the iTunes software can be clunky when running on Windows as opposed to on Macs.

  • www.apple.com/uk/itunes

    Tesco digital
    Catalogue 3.3 million tracks
    Price Unknown, but Tesco says downloads would be "competitively priced".

Tesco Digital will initially offer 3.3 million music tracks when it launches next month, with 1.6 million of those in MP3 format.

It plans for all of the site's music to be compatible with both iPods and all other MP3 players by the end of the year.

  • www.tescodownloads.com

    Napster
     Catalogue 4 million plus tracks
    Price 79p a track or unlimited access for £9.95 per month.
    The once infamous Napster is now on the right side of the law, after its name and logo were used to rebrand the pressplay download service in 2003. However, songs are not iPod compatible and the unlimited access service means that all downloaded tracks are disabled once membership is cancelled.
  • www.napster.co.uk

    HMV
    Catalogue 3 million plus tracks
    Price 79p per track or unlimited access for £14.99 per month.
    The service was launched in 2005 with the support of Microsoft, in an attempt to cut down Apple's dominance of the market.

However, like Napster, the files are in M4A format, meaning that iPod owners will not be able to listen to any downloads and will need to shop elsewhere.