Will you tune to Microsoft's Zune

Watching Apple's formula for success was a recurring pain for Microsoft for the last few years and now when it finally realized the threat posed by Apple's vertically integrated content and hardware distribution platform and is reportedly ready to throw all its weight into the upcoming battle. Microsoft is spending resources on developing its own hardware division. Instead of just mouses and keyboards, Microsoft now produces games consoles, web cams and soon Wi-Fi music players. On the same lines Microsoft on Friday confirmed rumors that it would soon be releasing a digital media player to challenge Apple Computer’s popular iPod, and its associated software and download service will be marketed under the name “Zune”. The Zune products will be available by the end of the year (read Christmas) as expected. It will launch at the same time as Microsoft rolls out a compatible music store, a la Apple's iTunes. Zune prototype that was being developed under the name “Argo,” has a reference to Greek Mythology’s Jason and his massive warship. Moreover with Windows Vista delayed into 2007, Microsoft desperately needs a hit for the holidays. They might actually have a shot with Zune, as Apple is rumored to have no major iPod upgrades planned until 2007 due to technical problems developing a 'real' video iPod.

The Zune is supposed to be capable of playing digital music, video, gaming, and downloading music over an 802.11b/g connection, however, the primary focus for the device will be on music for the first phase of launch. Zune will be having WiFi capability as well as an internal hard drive (reumoured to have 30GB HDD). WiFi capability is there to foster a community around the Zune, enabling Zuners to see one another's playlists, track recommendations wirelessly, and even share music with one another. In addition, Zuners will be able to send and receive content between the Zune and other Microsoft devices such as the Xbox 360 and mobile devices running the Windows Mobile OS. Also, the Zune will allow for a limited P2P experience which will be a "controlled sharing". But unlike the early P2P space, this sharing will have limitations. Speculation is that this community-sharing feature would be limited to 10 users in the same hot spot at a time (read "experimentation with new business models"). It is also reported to have a 400 Mhz DPS processor, which is more than needed just to listen to music and watch videos, but also suited for gaming. Microsoft is also promising a better-quality screen then the iPod.

Microsoft's Strategy

This is a major deviation from earlier strategy of Microsoft, which until now was to produce software to support other devices and platforms that compete with Apple like Yahoo!, Napster, RealNetworks, etc. Microsoft still has to model its content pricing with music labels and music publishers, who are trying to resolve how many times a Zune owner could listen to music on another owner's device, and how much money the music industry should receive each time a track is played. Currently music industry has two basic business models for online music sales. One model places iTunes' store as a benchmark and another is services like Napster and Yahoo!'s music store which is based over impressions. Zune's business model will not be a exact carbon copy of iTunes' as Microsoft seems to fight Apple for consumer's living rooms. Apple has already begun positioning its Macintosh line as a home entertainment device, and the company has been in negotiations with movie studios to transmit full-length films over the Internet. So the battle is all about the digital home. Zune-branded devices are apparently only one part of Microsoft's strategy as Microsoft's broader vision is to develop several use cases to discover and play entertainment content from a variety of devices including computers, phones and the Xbox 360. This broader vision seems to look OK but the initial inertia among the iPod users due to protected AAC content on their iPods will be a challenging task before Microsoft. Among the speculative rumours more exciting is that Microsoft will buy-out users' collections of iTunes purchased music and replace the files with Zune-compatible music. As many fans are aware, music purchased from iTunes will not play on anything other than an iPod.

Record labels will be eager to work with Microsoft to counter Apple's power in dictating prices. Moreover competition means more opportunities to sell digital music in ways Apple won’t allow like Microsoft is more open to variable pricing, whereas Apple is not. This means cheaper prices, more accessories, better services, and in general greater value for us the consumer. Same happened in case of Xbox vs. Sony PlayStation.


MSN Music's fate

Microsoft will support the Zune launch with a massive advertising and marketing campaign expected to be heavily artist-centric, including several live performances nationwide. According to company officials, total effort will be on par with that of the Xbox 360 launch, which cost a reported $500 million. Launch of Zune will change the fate of the existing MSN Music service. With all the company’s resources focused on Zune, it appears likely MSN Music will be left to die on its own.


Future Imperfect

Whether Zune will work with all of the third-party players out there, such as the Clix and devices from Samsung, Creative and others is still not clear. Ambiguity also lies in the compatibility of Zune with rival music services, such as Urge, RealNetworks' Rhapsody and Napster. This is a very important question, considering the current content distribution landscape as evident from the current sales figures. Apple's iTunes music store is used for 72 percent of music downloads, while Microsoft's store represents 3 percent. Microsoft has two options right now. One is to go for the exchange mechanism where iPod users will be able to exchange iPod compatible songs with Zune compatible ones. This will have a good amount of financial hit. Other unlikely option will be to go for isolation where Zune will not be compatible as well as there won't be any exchange. As second options might be a suicidal move for Microsoft so most likely it will go for the first one.