iPod Wars: Microsoft and Toshiba Team Up Against Apple

by: Yankee Group

By Carl Howe

Crunchgear.com confirmed from FCC filings that the first Microsoft Zune music players will actually be rebadged Toshiba Gigabeats. Now, it's no big surprise that Microsoft (NASDAQ:MSFT) isn't making its own hardware, but Toshiba (OTCPK:TOSBF) isn't exactly a contract manufacturer like Foxconn or Flextronics either -- it has its own brand and marketing. So why would Toshiba be willing to suppress its brand in favor of Microsoft's in such a strategic market?

To answer that question, we have only to look back about a year or so in the next-generation high-definition DVD wars. When Blu-ray appeared about to apparently sign every known hardware manufacturer and studio to its Blu-ray DVD player, both Microsoft and Intel (NASDAQ:INTC) went against the tide to sign up with Toshiba's HD-DVD player. Now Microsoft may have done this simply to avoid giving support to its gaming enemy Sony (NYSE:SNE), but Microsoft rarely does any type of public business deal without asking for something in return privately. Our bet is that Microsoft called in this favor from Toshiba to have something to sell for the Christmas 2006 holidays.

tosipod side
L to R: Apple's iPod Video and Toshiba's Gigabeat

Which leads to an interesting question: If the Microsoft Zune is just a Toshiba Gigabeat, which was already a Microsoft music licensee, what secret sauce is Microsoft adding that will make Zune a success when Gigabeat sales have been, well, lackluster? Perhaps we'll find out in November. But as with the XBox launch and Sony's PS3, leaking the device and specs in advance is just going to make marketing it that much more difficult.

On the other hand, since Toshiba is the supplier of 1.8-inch hard drives to Apple for its iPods, the revelation that Toshiba products will be competing directly with the iPod may have repercussions. I'll bet that Apple (NASDAQ:AAPL) is calling other hard drive suppliers this week asking how many 1.8-inch hard drives they could supply for Christmas. After all, last year Apple sold 14 million iPods just in the Christmas quarter. This year's target is undoubtedly even bigger. And after innumerable bruises from prior battles with Microsoft, Apple won't assume that its competitors will play fair.

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