Microsoft’s Digital Media Player: Zune

Microsoft has decided to counter stalling PC sales and stiff competition from Internet-based services such as Google and iTunes by making a move into the digital media player market. The company recently announced that by this holiday season it intends to release a digital entertainment device to rival Apple’s iPod; the device is the first in “a family of hardware and software products,” currently named Zune. If successful, Zune could kill two birds with one stone; sales of the player and associated media, which will be sold through its own online store, could boost Microsoft’s bottom line while taking a bite out of Apple which relied on iPod sales for roughly 40 percent of its revenues in 2005. In addition, Zune could give Microsoft much needed position in what may be the industry’s pivotal market; some say that the true reason behind Zune is to stop Apple from further dominance as the computer and digital media move into the living room. In an effort to ensure victory, Microsoft is betting big on this endeavor; accompanying its launch with an advertising campaign of a reported $500 million. This is not the first time Microsoft has taken on entrenched rivals; it pitted its Xbox game console against Sony’s PlayStation and came out on top. Morningstar analyst Toan Tran noted this, “The iPod is going to be a tough nut to crack, but you probably could have said the same thing with Sony and the PlayStation and it [Microsoft] has done a good job positioning the Xbox.” However, as Tran notes, it may not be an easy victory. Apple already has over 70 percent market share in both digital music sales and digital music players; this alone will be a challenging hurdle for Microsoft.

Microsoft’s move to end the reign of Apple and its iTunes store is not new; however, what Zune introduces is a new business model. In the past Microsoft has sought to conquer Apple through partnerships with services such as Yahoo!, Napster, and Real networks; and with hardware manufacturing companies such as Samsung, Sony, and Toshiba, each of which has its own version of the iPod. However, to date none of the partnerships have proven successful; not one of its partners has even a 10 percent market share. In the partnership business model Microsoft was content to supply the software for its partners’ services and devices; Zune has Microsoft taking matters into its own hands and as such represents a marked departure for the company.

Though Virgin Records executive VP Jeff Kempler, noted that, “We’re going to have to think about evolving licensing schemes that have some flexibility in them,” music industry executives who were briefed by Microsoft are generally pleased. George White, senior VP of strategy and product development at Warner Music Group, said, “We’re incredibly excited by it. . . It’s something that we hoped peer-to-peer services would bring to the digital retail space.” In general, these executives see the competition from a company with the clout of Microsoft as a good thing, in that it may help to break the hold that Apple has on the market. According to Reuters, “While publicly praising Apple’s success in building the digital music space, music industry executives have expressed frustration at the company’s my-way-or-the-highway tactics. Competition means more opportunities to sell digital music in ways Apple won’t allow. For instance, Microsoft is more open to variable pricing, whereas Apple is not.” Flexible models represent only a part of how Microsoft is seeking to set itself apart with Zune.

Zune also stands apart from the iPod and other players by the fact that it is to be wireless; other digital media players rely on a computer for the downloading and transfer of files, Microsoft’s offering will be untethered. Many see this as a key to the device’s success, and as such it will be leveraged in other capabilities, though how remains unclear. According to Reuters, Microsoft’s new GM of marketing for MSN Entertainment Business, Chris Stephenson says that, “the company is examining ‘seven or eight’ different wireless scenarios.” These scenarios include allowing users to sample music stored on other Zune devices in the same hot spot and the ability to access content stored in an online digital locker. Zune users will also be able to interact with one another through shared playlists and music recommendations. The Zune line is to be more than just an iPod from Microsoft, to succeed it will try to be that and more; in large part by filling in some of the holes in the Apple product line. There are those that think it just might make it.

Analyst Toan Tran says, “Microsoft definitely has its work cut out for it, but the company has massive financial resources and it’s very persistent.” However, success, even for Microsoft, is not a guarantee. There is the huge market share that Apple has already to overcome; Zune will need to be very compelling to get iPod users to switch tracks. There is also the fact that the product is not yet fully operational, which could affect Microsoft’s quest for content partners. In a Bloomberg piece Anne Sweeney, co-chairwoman of Disney Media Networks and president of Disney-ABC Television Group, remarked that when Apple Chief Executive Officer Steve Jobs went to Disney to gain programming for the video iPod his case was compelling, “Jobs came in to Disney. We held it. We could see it . . .We haven’t had that experience with Microsoft.” (By the way, Jobs is on Disney’s board and is the largest individual shareholder.) Also, there is the fact that the iPod is simply not a Microsoft product, and that alone may count for something.

As big as a win would be for Microsoft in this arena there are suggestions that it is really a larger battle that the company is looking at. According to Forbes, “It’s unlikely that Microsoft intends to take back Apple’s control of the portable music player market. Instead, its strategy seems aimed at getting in front of Apple’s plans to leverage its iPod success into other markets–most significantly consumer’s living rooms. Apple has already begun positioning its Macintosh computer line as a home entertainment device, and the company has been in negotiations with movie studios to transmit full-length films over the Internet.” Jupiter analyst Michael Gartenberg agrees, “This is about far more than the iPod. This is a battle about the digital home . . . Apple already controls one end of the system. That’s a huge threat to Microsoft.”

Microsoft clearly has intentions behind this launch, some stated, others not, and the “iPod Killer” is already making a lot of noise, however, Gartenberg sums things up well, “When a player the size of Microsoft jumps into the pool, it definitely makes a splash . . . The question is will it have a lasting impact?”

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