Coming Zune: Is Microsoft's Soon-to-be-Released xPod Already a Bust?

Includes: AAPL, MSFT
by: Yankee Group

By Carl Howe

BillBoard magazine has the scoop, but it's covered in the Wall Street Journal (sub. req.) late on a Friday evening too. Microsoft (NASDAQ:MSFT) will launch a digital music service, player, and brand called Zune. You can see a viral marketing site at, but all you'll see is a cartoon and some music. The initial device won't be PlaysForSure compatible in favor of creating a more seamless consumer experience.

Michael Gartenberg of Jupiter Research notes:

Bottom line, when Microsoft decides to enter a market, you can't ignore the impact they will make. It's likely that by force of will and spending lots of money on marketing with a high cost of acquisition on new users, they will can capture some market share.

Ummm...Right. Microsoft spent in excess of $10 billion on MSN, and it hasn't really made a dent in Yahoo (YHOO) or AOL (NYSE:TWX). And it's working on similar results in XBox 360 land, where it lost $1.3 billion last year promoting a platform on which it loses more money the more units it sells.

And the marketing thing? Credit where credit is due, the concept of buying out people's iTunes music collections will certainly reduce consumer reluctance to switch. But pre-announcing the product two months ahead of introduction is never a sign of a good marketing plan. That's strike one against the program, and it isn't even up to bat yet.

If you want more details, Engadget, which is rapidly turning into the all-Zune channel, has more data than most.

All I can say is, now we know why Microsoft notified Wall Street that it was going to be spending more money this year. This program has red ink written all over it. Just do the math. How many songs does Microsoft have to sell to make up for the R&D, marketing, and launch costs when it is fighting an entrenched competitor that has 70% market share?

MSFT 1-yr chart:

MSFT 1-yr chart

Full disclosure: I have a small position in Apple (NASDAQ:AAPL) stock, but that doesn't change the math or the marketing blunder.

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