Microsoft's Strategy To Grab iPod Market Share: Subsidize Zune To the Tune of $150

Includes: AAPL, MSFT
by: Yankee Group

By Carl Howe

Mike Evangelist, writer of the excellent blog Writer's Block Live, had an interesting comment on my weekend article on Microsoft's marketing strategy for its Zune music player: occurs to me that there may be another answer that explains Microsoft's odd behavior regarding the price and compatibility of the Zune. I think they are going to subsidize it...sell them for $99, or something like that. Buy their way into the market, then milk users for the rest of their lives as they buy/rent media.

Microsoft's Zune: ready to do battle with the iPod this Christmas?

I think Mike may have hit on Microsoft's plan. It's very akin to the XBox 360 pricing strategy, where Microsoft loses about $156 per XBox 360 they sell, with the assumption they'll make up the difference in game and Xbox Live revenues sometime in the future. With music subscriptions offering up visions of consumers playing $120 to $240 a year to Microsoft, subsidizing a Zune player by $150 or $200 might make a lot of sense to grab market share. While it would cost Microsoft something around $300-$400 million this year in subsidies and more next, such a strategy would have a chance of breaking Apple's dominant position. However, history doesn't favor a Microsoft win here, though; there are no examples of a company successfully building a sustained profitable business from such a subsidization strategy with one exception: the Sony (NYSE:SNE) Playstation 2.

So keep your eyes peeled for the possibility of $99 30-GByte Zunes. If Microsoft does that, Christmas music player sales could get very interesting.

Full disclosure: I own shares of Apple.

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