Zune is Real and Here's What it Means - First Take Analysis

Michael Gartenberg | July 21, 2006, 03:02 PM

Well, it's 12pm PDT and my embargo is lifted so I can finally stop talking about this in terms of something Microsoft "might" do and now start talking about what it means. If you have the current issue of Billboard, there's an article in there as well.

First, this is an acknowledgement that Microsoft is clearly not happy with Apple's dominance in digital music. I don't think it is concern about new growth scenarios. It's more a concern that Apple controls a key endpoint in the digital home and that Apple bits flow only to other Apple controlled bits or devices. That scenario doesn't bode well for Microsoft's larger ambitions Second, even though Microsoft still talks about the diversity of the Windows platform asan overall advantage, let's face it, the platform argument is dead and licensees will have to deal with it. On one hand, no one has ever successful created a business where you license technology to licensees and simultaneously compete with them on the device side. On the other hand, it's not like there's a lot of other places for licensees to go to get technology.

So what's the challenge? Essentially there are three things.

Creating a technically competent challenger - Arguably this is the easiest thing for them to do. Apple's shown the way on what features the market wants. Less obvious are how Microsoft will differentiate with features like WiFi, that few mainstream consumers want and serve as a something that not only boosts for the bill of materials but also kills important features like battery life. Good news is the focus is on music and video. Despite the rumors, there's no game functionality included according to MSFT (despite the team's xbox heritage). That will make a big difference in terms of marketing.

Creating a lifestyle device - Microsoft is clearly going to face a battle here. It's good that they're building a unique brand and following the Xbox tradition, distancing themselves somewhat from Microsoft identity but that's not enough. Zune isn't a bad name (and yes, that's the real name it seems although i did like Argo a lot better). It's going to be hard for them to create the same level of cachet that Apple has with the iPod.

Creating a platform - iPod is more than a single device. It's a platform in and of itself with a whole eco system of cases, car kits, speakers and docks. No doubt that MSFT will work hard to make sure that they fill some of the gap directly with first party stuff, but this is one area where consumer choice goes a long way in making the platform a success.

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.

Early market share, however, isn't likely to come from disgruntled iPod users looking to switch. The real losers in the short term are likely to be the likes of Creative, iRiver and other former partners that have failed to deliver to market share from Apple and will now find themselves not only competing with Apple but with their former partners from Redmond. More on this in the days ahead.

Update - Engadget is of course all over the story as well