It's far from an iPod killer, but Microsoft Corp.'s Zune digital music device will finally arrive in Canada this spring.
Microsoft chairman Bill Gates was expected to make the official announcement during his opening keynote address Sunday night at the 2008 International Consumer Electronics Show in Las Vegas.
“We are excited to offer Canadians an alternative music experience with Zune,” said Zune Canada group manager Craig Tullett.
Along with three different capacity WiFi-enabled Zune music player devices – 4, 8 and 80 gigabyte – Microsoft also will be launching Zune software and Zune Social, an online music community. However, the company's music retail service Zune Marketplace and its music subscription service Zune Pass will not be available until later this year.
Underdog isn't a role Microsoft is familiar with, but it is the position in which the software giant has been cast in the digital music market.
In much the same way that the Redmond, Wash.-based company has come to dominate the market for PC operating systems by making it virtually impossible for a competitor to challenge the supremacy of its Windows products, Apple Inc.'s iPod and iTunes music store enjoy strangleholds over the digital music arena.
Although companies such as Microsoft, SanDisk and Creative have released comparable music playing devices, none of Apple's competitors have been able to mount a challenge to the Cupertino, Calif.-company's iTunes music store and file-management program, which offers users an end-to-end solution for purchasing, organizing and playing their tunes, including Microsoft's Zune Marketplace.
“It's hard to be as good as the iPod because part of the iPod experience is the integration with the iTunes store which has several years of momentum behind it,” Forrester Research Group analyst James McQuivey said.
Microsoft launched the Zune in the U.S. in November of 2006 with a 30 GB model.
Last year the company eclipsed its stated goal of selling one million Zunes, shipping a total of 1.2 million. By comparison, since launching the first iPod in 2001, Apple has sold more than 100 million units, and more than three billion songs through the iTunes store.
Compounding matters for Microsoft is the battle over digital rights management (DRM) between Apple and the rest of the industry. Although Apple has started selling select songs from EMI and a handful of other labels in MP3 format – a universal DRM-free format – most of the songs purchased through iTunes still can't be used on competing devices like the Zune. Likewise, most songs available at the Zune Marketplace store come in the Windows Media format and can't be played on an iPod.
Although the major music labels continue to fight for it, DRM's days are numbered, a change in the industry that bodes well for the Zune.
Amazon.com, the world's largest Internet retailer, recently launched a DRM-free all-MP3 store that features music from three of the four largest record companies in the world – Universal, Warner and EMI – and both the Zune Marketplace and iTunes now offer a limited selection of songs in the MP3 format.
“If Amazon starts selling a lot of DRM-free music it's going to set the consumer expectation that DRM-free music is the way to go,” Mr. McQuivey said. “Even if it takes Microsoft a while to adopt it in their own store, the fact that people can buy [DRM-free music] elsewhere and play it on their Zune makes it that much more valuable.”
One of the advantages the Zune has over the iPod is its ability to let users share songs with other Zune users via WiFi networks, a service which is currently somewhat ineffective due to the smaller user base, but has potential, analysts say.
“It's a feature that should get better later, and it's something Microsoft has been honest with itself about how long it will take before that benefit catches on,” Mr. McQuivey said.
Microsoft has been criticized for its decision to embrace a music subscription model, called Zune Pass, in which users pay a set fee every month to have access to a large music library but don't own the music. Other companies such as Napster Inc. and RealNetworks Inc. have attempted similar programs to varying degrees of success.
“People are interested in owning their music,” Mr. McQuivey said. “So it's hard for Microsoft to grow their subscription music store when it hasn't worked anywhere else. It's not like they can ride that wave because there isn't a wave to ride.”
Microsoft has been down this road before when it comes to building a brand outside its core business. In 2001 the company launched the Xbox video game console as a challenger to Sony's Playstation 2. It was to be the pillar of the company's new entertainment and devices division, under which the Zune project also falls.
However, the PS2 outsold the original Xbox nearly four to one and Microsoft incurred millions in costs due to faulty systems. Despite revenues of $6-billion (U.S.) last year, the division is only expected to turn a profit for the first time this coming year as the company's next generation console, the Xbox 360 has carved out a healthy share of the market due in large part to the popularity of the Microsoft-exclusive game Halo 3.
In the company's latest annual report from last August, the Zune merits only a brief mention. But make no mistake, Microsoft has seen the windfall Apple has enjoyed from the digital music space, and Redmond wants a piece.
Much like the company's entry into the video game market, its move into digital music players has been slow and methodical, bordering on lumbering as it sets low sales targets and slowly introduces new models, gauging the market's response carefully. But eventually Microsoft expects the Zune to be a second major pillar to the entertainment and devices division.
It's a little too low for Yankee Group analyst Josh Martin, who says the company's goals have been too modest.
“I believe they could have done more with the next generation Zune, but they didn't want to get too far ahead of the market and instead the market got too far ahead of them,” he said. “As a user, would you leave your iPod for something that is equally as compelling or maybe slightly less compelling? The the answer is no.”
Still, don't count Microsoft out just yet, he said.
“I think it would be silly to ever bet against a company that has billions of dollars in the bank, but at the same time they face a stiff challenge,” he said.
