Microsoft Prepares to Take On iPods With Zune

Microsoft (Nasdaq: MSFT) is planning to release a new music and entertainment player and accompanying software and hardware products under the brand "Zune," turning up the competition on Apple's (Nasdaq: AAPL) popular iPod.

The company did not reveal pricing or a specific target date, but simply confirmed speculation of the offering and said that the first products would ship later this year. "We see a great opportunity to bring together technology and community to allow consumers to explore and discover music together," Chris Stephenson, general manager of marketing for Microsoft, said in a statement.

Market Dominance

Microsoft will be making more details available over the next few months.

With the iPod enjoying a 75 percent U.S. market share and Apple reporting a 32 percent growth in year-over-year iPod sales this past quarter, analysts doubt Apple has to worry at this point.

"In this new marketplace, consumers set such high expectations," Mike McGuire, research vice president at Gartner (NYSE: IT), told TechNewsWorld. "Consumers pay for the hiding of technology. That's what consumers enjoy about iTunes -- the technology does not get in the way of you listening to music. It will be interesting to see if Microsoft is able to pull this off."

Uphill Battle

"It's good that they're building a unique brand and following the Xbox tradition, distancing themselves somewhat from Microsoft identity, but that's not enough," he told TechNewsWorld. "It's going to be hard for them to create the same level of cachet that Apple has with the iPod."

Why does Microsoft even want to take on the challenge? It is an acknowledgment that the company is clearly not happy with Apple's dominance in digital music, according to Gartenberg. "I don't think it is concern about new growth scenarios," he said. "It's more a concern that Apple controls a key endpoint in the digital home and that Apple bits flow only to other Apple-controlled bits or devices. That scenario doesn't bode well for Microsoft's larger ambitions."

Apple has visibility because it brings all parts of the experience to the consumer -- from the computer to the service to the musical device itself, according to McGuire. Typically Microsoft creates a platform and software and works with hardware partners. But with Zune, the company is extending the strategy and practice it started with the Xbox, McGuire said.

Strategic Approach

Strategically, Microsoft shouldn't try to steal iPod share, but rather try to expand the overall market, McGuire suggested.

"Apple's base is what it is. What would be the incentive for me to switch? Is the product going to be that good out of the box?" he said. "But CDs are still the primary way people get their music. The more interesting opportunity is how do you convince the people who are still buying CDs to buy music online."

As Microsoft strategizes, it should be business as usual for Apple, McGuire said. What the company did with the iPod nano is indicative of its approach in general, he explained.

"The nano effectively replaced the mini. They designed something to replace it at the height of its popularity because they were confident it was better and they could replace it," McGuire said. "Once the competition starts to focus in on them, they will continue to move the bar forward. They are not a company that acts defensively."