Breaking with its digital media partners, Microsoft will manufacture a family of digital media devices and related online services under the brand name Zune. The first Zune products, a portable audio and video player and online store that will compete against Apple's iPod and iTunes Music Store, are scheduled for the 2006 holiday season. The move comes as Apple's continuing dominance threatens the Windows Media platform and indicates Microsoft's newfound willingness to build hardware rather than cede a strategic market.

Battling Apple

The iPod's style and ease-of-use have made it one of the most popular consumer products of the decade and it consistently hovers around 75% market share for digital music players. The popularity of the iTunes Music Store, with over 1 billion songs sold and approximately 70% of the market for legal music downloads, further strengthens Apple's dominance because content purchased from it cannot be played on any other device.

Microsoft has taken numerous steps to counter Apple with the Windows Media platform:

• Signing up partners to create portable devices (including Creative, iRiver, Rio, Samsung and—for a brief period—Dell)
• Promoting online stores (most recently, MTV's Urge service) in the Windows Media Player, which ships with nearly every copy of Windows
• Creating a reference design for portable audio/video players (Portable Media Centers), which partners began shipping more than a year before Apple added video support to the iPod
• Developing a logo program, PlaysForSure, for Windows Media content and devices that are compatible with one another.

None of these tactics have dented Apple's market share. Apple's continued dominance could hamper Microsoft's overall home entertainment strategy, which promotes the Windows PC and other devices running Microsoft software as the best tools for creating, storing, editing, and playing audio and video content.

What's Known So Far

Microsoft only confirmed Zune's existence after several weeks of stories in the media and on blogs. (The source for these stories might have been entertainment executives, whom Microsoft briefed earlier in 2006 in hopes of convincing them to offer content for Zune.)

The company might have hoped to delay news of Zune to keep Windows Media hardware partners cooperating as long as possible: when Zune arrives, those partners will be competing not only with Apple but also with the maker of their own software platform. Delaying the news also could have prevented Apple from duplicating or leapfrogging planned features of Zune.

As of July 28, the following is known about Zune:

• The first Zune products will be a portable digital audio and video player and associated store, both scheduled to be available by the end of 2006
• The Zune initiative is being driven by Microsoft's Entertainment and Devices group under President Robbie Bach, former Xbox leader J Allard, and former divisional finance chief Bryan Lee; this is a change from Microsoft's current digital media strategy, which was driven by teams in the Windows Client group (most of these teams moved into Entertainment and Devices in 2006)
• The first device will have a hard drive and Wi-Fi connectivity; rumors suggest the latter feature could be used to allow Zune users to stream (but not transfer) songs to up to 10 other users within range, enable on-the-fly downloads, and play subscription content from the Zune store without first having to download it to a PC
• Zune devices and the Zune store will not be compatible with PlaysForSure—the devices won't play content purchased from other Windows Media stores, and songs purchased from the Zune store won't play on other devices
• Zune products will have a "social" aspect—for example, users will be able to view and sample songs from one another's playlists and recommend playlists; these functions will extend in some unspecified fashion to other Microsoft products such as the Xbox 360, Media Center PC, and Windows Mobile phones.

Can Microsoft Win?

There are several reasons why Microsoft might succeed in the digital media markets where its partners have not.

Consistency. Microsoft promoted choice of devices and stores as one benefit of the Windows Media platform over iPod and iTunes. But this abundance of choices might have confused customers—even with the PlaysForSure logo, customers couldn't easily tell where to get a particular type of content (e.g., subscription-based music; rental TV shows) to play on a particular device. Moreover, Microsoft's efforts to treat partners equally gave partners few ways to differentiate themselves, and users little reason to choose one device or store over another. If Microsoft follows Apple's lead and limits Zune to one device and one store, it should eliminate this confusion.

Budget. Microsoft's size and cash enable it to spend more on research and development and marketing than most of its partners can afford.

Packaging. Microsoft could bundle or tie Zune to other popular products—for example, it could bundle the device with Xbox peripherals or consoles, build a link to the Zune store into the Windows interface, and make Zune content downloadable on PCs and through the Xbox Live Marketplace.

Even so, Microsoft has many ways to stumble: a high price, poor user interface, or overly complex features could doom Zune. Or, Microsoft might force Zune to share the spotlight with other Windows Media players and stores, which would perpetuate customer confusion. Finally, Microsoft won't easily duplicate the "buzz" created by Apple's dedicated retail outlets and its keen understanding of style and design.

Partners and competitors should note that the portable device and music store are only the first Zune products. Likely future steps include a flash-based portable music player to compete against the iPod Nano, and a portable gaming device to go up against Nintendo's DS and GameBoy and Sony's PlayStation Portable. Microsoft might enter other consumer electronics markets, such as home media servers or digital video recorders, particularly if Apple, Sony, or another competitor has a runaway success in one of these areas and threatens a critical Microsoft product. As Microsoft CEO Steve Ballmer said at the 2006 Financial Analyst Meeting in July, "Philosophically we used to say we'll never do hardware...now I think what we're saying is where it's smart and where we need to—don't expect us to do PCs, I think that ain't gonna' happen—but where it's smart, in some of these new device types, we will consider it."

A Zune teaser Web page is at https://www.comingzune.com/.

Members of the Zune team have blogs at www.zuneinsider.com/ and www.madisonandpine.com/.