Seeking Alpha
Research analyst, tech, internet
Profile| Send Message| ()  

By Carl Howe

Two days after Apple (AAPL) refreshed and lowered the prices on its iPod line (and thereby wrought havoc on Microsoft's launch plans), Microsoft (MSFT) Thursday announced its own 30 Gigabyte Zune music player. This first product in the Zune line is, in fact, a rebadged Toshiba Gigabeat. It offers an FM tuner, will be available in black, brown, and white, and will provide wireless connectivity between Zune devices. In its press release, Microsoft commented on the Zune-to-Zune wireless sharing:

Wireless Zune-to-Zune sharing lets consumers spontaneously share full-length sample tracks of select songs, homemade recordings, playlists or pictures with friends between Zune devices. Listen to the full track of any song you receive up to three times over three days. If you like a song you hear and want to buy it, you can flag it right on your device and easily purchase it from the Zune Marketplace.

That sounds pretty restrictive from where we sit and a far cry from a the unlimited WiFi sharing previously rumored. It will be interesting to see consumer reaction to this feature and whether it actually drives or inhibits Zune sales.

But from a marketing point of view, this was not really an announcement, since Microsoft neither announced the price nor made the product available to consumers. Microsoft also declined to mention a launch date. Yet, the lack of any actual product didn't stop Microsoft from immediately positioning Zune as a platform:

"The digital music entertainment revolution is just beginning,” said J Allard, vice president, design and development, at Microsoft, who is leading the charge for building the family of Zune products. “With Zune, we are not simply delivering a portable device, we are introducing a new platform that helps bring artists closer to their audiences and helps people find new music and develop new social connections.”

But consumers don't care about platforms. They want music players that look cool, work seamlessly, and don't require paying monthly fees forever to listen to their own music. And pre-announcing a product without pricing, availability, and actual services is just a waste of a press release.

Microsoft had an opportunity to build some mystery around the features that would actually be in Zune and some buzz about what the Zune experience would be like. But with Microsoft laying out the major features of Zune now, it is letting consumers compare Apple's new fifth generation iPods with Zunes head-to-head with an important distinction: consumers can buy Apple iPods and can't buy Zunes.

Microsoft may have thought it needed to do this announcement to respond to Steve Jobs' event last week and staunch the new flood of iPod sales. But if Microsoft thought they were going to spoil Apple's biggest iPod Christmas ever, it just threw away one of its chances to do so.

I did some checking on the wireless sharing digital rights management. It turns out that the play-three-times-over-three-days limit applies not only to purchased music, but also to any music you may have transferred from CDs. Definitely not a feature.

Another sharing detail: some bloggers have been drooling over the possibility of DJing music to a room full of Zune users. However, I've seen no evidence that the device can stream music to other Zunes, just share the song itself. Without devices in the field, it's too early to know which way this goes, but my bet is that streaming over an uncontrolled WiFi connection turned out to be too iffy to make work. We'll see.

zunes
Microsoft's Zune: iPod killer instinct?

The real target market for Zune?

In following the reaction to Microsoft's Zune announcement last week, I came across this piece from Reuters claiming that Zune's wireless connection is one of the characteristics that make it an "iPod killer." So I started thinking about consumer usage scenarios, and suddenly ran into a brick wall.

Now first, credit where credit is due. Microsoft marketing has decided sharing is Zune's big differentiating characteristic, so they are emphasizing that characteristic in all of their messaging. That's a good marketing strategy.

But stop and think for a minute. A consumer decides sharing is for them, and they run down to their nearest Best Buy on the day that Zune is actually released. There they plunk down their $299 (at least that's the price at which Crutchfield sells Toshiba Gigabeats), run home, load up their Zune with ripped CDs, and head out to their favorite hangout for a full night of music-filled sharing. Sounds great right?

Only problem: no one else there has a Zune to share with.

Do the math. Microsoft can probably ship at most one to two million units by Christmas, and that will be the peak selling season for the year. During that same quarter, Apple will probably ship anywhere from 14 to 20 million iPods to add to the 60 million it has already sold. So Zunes are going to be two to three percent of the installed music player base this year -- and that's about the best case scenario. How do you have a great sharing experience with only two to three people of out a hundred? You'll be lucky if you see anyone else with a Zune in the first year -- after all, that was the way iPods were in 2001.

And then think about the purchasing decision and the purchasing profile. These aren't inexpensive devices. They cost as much as an XBox 360 (and, if Microsoft decides they don't want to take a complete bath on the extra cost of WiFi, more than an equivalent iPod), and therefore, they aren't an impulse purchase. And while they are ramping up, for every Zune sold, five or ten other people will buy iPods because they are the obvious choice for a music player.

So let's recap. Microsoft's target market is a group of people who have high disposable income, like to think differently, enjoy sharing experiences, and like going against the crowd. This is actually a wonderful target market. We know a lot about them. In fact, they've created some of the highest profit margins in the entire computer and consumer electronics industry for a single company.

The only problem: they've been buying Apples for years.

Limited content compatibility

Zune won't play content from Rhapsody, Yahoo! Unlimited, Movielink, and others

According to the Electronic Freedom Foundation, a careful reading of Microsoft's Zune press release (specifically footnote 4) indicates that Zunes will not be able to play protected Windows Media Audio and Video files. What does that mean? It means that Zune will provide no choices for content; you either buy protected content from Zune marketplace or are on your own to find unprotected content. Microsoft's own PlaysForSure content, if it is protected as most subscription and rental sites require, won't play on Zune.

I've posted previously that Microsoft is now suffering the fallout from its long string of business errors, so I won't belabor that point. But this marketing decision seems particularly wrong-headed because it is alienating its hardware and content partners -- the very people responsible for paying it the license fees that keep Microsoft's lights on.

I can understand that the Zune marketing strategy is to separate the brand and technology from the overall Microsoft media strategy. But Microsoft is sacrificing the PlaysForSure brand and all the partners that bought into that program (which already was referred to as "might PlayForSure") on the altar of Zune marketing. This may be nothing new from the company that bragged about "cutting off Netscape's air supply," but the difference here is that these were allies, not enemies in Microsoft's digital music business. If I were iRiver, Creative, Samsung, and just about every other music hardware OEM, my marketing VPs would be lining up with pitchforks and torches outside Microsoft's Redmond headquarters asking for the head of J Allard.

Microsoft had better be feeling really good about its new hardware and content businesses. With business partners getting this type of treatment, it's going to have a lot more trouble signing up licensees in the future.

MSFT-AAPL 1-yr comparison chart:

MSFT-AAPL 1-yr comparison chart

Source: The iPod Wars, Mach 2: Apple Gearing Up to Be the Grinch That Steals Microsoft's Christmas