Zune: Falling Down on Cool

Sure, Microsoft's music player will build a base, even among some iPod users—but it can't hold a candle to the iPod in the way that matters most

by Arik Hesseldahl

As much as I like my iPod—I've owned three or four over the years—I've had to come to terms with the unpleasant fact that not everyone does.

My best friend is one of those people. His music player is a little Creative (CREAF) Muvo and there's nothing that I or Apple Computer (AAPL) can do or say to change his mind. I went so far as to give him an iPod nano. He gave it to his girlfriend. So much for proselytizing.

After five years of pummeling us with the iPod and its associated iTunes music service and some 3,000 accessories, Apple is poised to face what some might say is its first real challenger. And that challenger is Microsoft's digital music player, Zune, which is poised to hit the market on Nov. 14 with the express intent of encroaching on Apple's turf.

You Can't Discount Microsoft

I can't fault Microsoft (MSFT) for envying Apple's success. (And it's not exactly the first time that Microsoft has looked on enviously at something that Apple does.) Even for Microsoft, which took in $44.6 billion in revenue in the most recent fiscal year, a product that brings in $7.6 billion in sales a year is nothing to sneeze at. Over five years, Apple has sold nearly 70 million iPods worth nearly $14 billion—all that at gross margin estimated to be at or near 50%.

So does the Zune have a chance? I've learned over time it's not wise to discount Microsoft. I thought little of the Xbox game console only to watch it grow in popularity and spawn the Xbox 360, which is also doing well. With the consoles, Microsoft proved its willingness to take a financial loss over time to establish a market beachhead (see BusinessWeek.com, 11/22/05, "Microsoft's Red Ink Game"), which is something Apple doesn't traditionally do—and certainly couldn't afford to do when the iPod launched.

The financial dynamics for the Zune are inherently different. Microsoft can't realistically sell a $249 Zune at a loss and expect to recoup losses on music sales. As successful as iTunes is in helping Apple sell iPods, it's not that impressive when you compare the music service to sales of the hardware. Yes, Apple has sold 1.5 billion songs since the launch of the iTunes store in spring 2003—but that averages only 22 songs per iPod sold during the same period.

Wi-Fi Sets Zune Apart

I haven't played with a Zune yet (though I intend to). But so far, the device doesn't have much to offer compared with the iPod. It will come in only one storage capacity, and that isn't all that high, especially when you consider that it's intended to play a mix of music and video. The Zune won't have all that many accessories, won't integrate with any cars, and doesn't support any language other than English.

So what does Zune offer the potential iPod-hater beyond the fact that it's not an iPod? For one, there's wireless connectivity. Zune users will be able to share songs directly from one device to the other, and maybe down the road, there are some other scenarios that might make Wi-Fi access worthwhile, like streaming audio from the Internet (which can already be done with some wireless phones).

But how many times a day do you really feel like sharing a song that's playing on your personal player with someone else? It's almost more efficient, and more permanent given the "3-play 3-day" limitations on playing shared songs I've been hearing about, to burn a CD and give that to your friend.