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By Carl Howe

So much for the $99 Zune.

Last week I hypothesized that Microsoft could do some serious damage to Apple's (NASDAQ:AAPL) iPod domination by launching its Zune music player at $99. Well, so much for that theory. Today, Microsoft (NASDAQ:MSFT) announced that the Zune will retail for $249.99, $0.99 more than Apple's fifth generation iPod video. I suspect that still represents a subsidy of the product, but probably only about $50 per device. And blog readers got that prediction right, by the way; more than a third voted on my blog entry that they believed that Zune would launch for $249.

The bad news: at that price, this interim product is going nowhere. It will sell to those people that love Microsoft products and few others. Microsoft even managed to alienate music lovers who already have bought a lot of Microsoft music, since the player won't play protected Windows Media files other than those from the Zune store (that includes ones bought from stores like MSN!), and it will impose sharing restrictions on unprotected MP3 files that the user owns. With no compensating price advantage, this marketing plan provides little differentiation from iPods and many disadvantages. And without a massive deployment of these devices, the wireless sharing feature becomes moot.

At least Microsoft is consistent: users will have to wait for Zune 2.0 before we find out whether Microsoft will actually challenge Apple for digital music player leadership. But Zune 1.0 appears to be dead on arrival.

Full disclosure: I own shares of Apple

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Source: Microsoft Zune's As Good As Dead On Arrival