The Chances of Zune's Success

By Scott M. Fulton, III, BetaNews

September 15, 2006, 9:53 PM

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"What Zune really provides for Microsoft," stated NPD's Ross Rubin, "is a chance for a portable media platform with which they can build their own kind of service architecture. They don't need to rely on third parties supporting it; they don't need to try to get it through carrier distribution, because they can distribute it through retail, and that allows them more flexibility in terms of pursuing their overall corporate entertainment strategy."

As both Rubin and Info-Tech's Carmi Levy pointed out, growth in the portable media market is slowing down, both worldwide and in North America. Although Apple blamed "seasonality" for declines in iPod growth over the last two consecutive quarters, they were the first such declines in the history of the product, dating back to 2001.

But there's a strong case to be made against concentrating portable media development for cell phones and handsets, which are dependent on carriers like Cingular, Sprint, and Verizon for their distribution. Although Zune's Wi-Fi connectivity doesn't make it a general-purpose communications device, that very fact means its wholesale buyer is the everyday retailer with whom Microsoft has already created a relationship via the Xbox.

"There's tremendous resources [for Microsoft] to bear on this - hundreds of millions of dollars over the course of the next several years," stated Rubin. The results of such an investment, he said, could parallel its situation with Xbox 360, "where they were chasing an established market leader, and in that market, they've invested millions. The relative amount of investment here is smaller, but it's still very significant, and still well beyond what a number of these smaller players would do."

This gives Microsoft time to develop accessories -- which any brand needs to survive, and which a brand like iRiver would need to develop in a pinch -- as well as the mind-space it needs to create a powerful advertising campaign, on a par with Apple's.

Apple's advantage is that its brand is now a fashion statement unto itself. Wearing a Creative brand onto the train to work, for many, could be as shameful as wearing (gasp!) Converse shoes instead of Nikes onto the basketball court. So imagine if the brand you chose to wear was Microsoft.

It's Apple's brand that is its best advantage today - in some analysts' eyes, more so than the iPod's current feature set. "If you look at it on a dollar-for-dollar, value-for-features basis, the iPod isn't that great of a deal," Levy believes.

"Creative, iRiver, and Samsung right now quite frankly offer models that, on a feature-for-feature basis, have more features and larger capacity, and cost the same or less money than a comparable Apple product. The Shuffle has no screen, no FM radio, no microphone, can't record, can't do voice dictation, whereas all the other devices in that price class do. Yet the Shuffle continues to outsell them all because it's got that brand, that cool factor...So if you have $200 to spend, it's compelling for people to go for an iPod as opposed to having to explain their decision to everybody who asks."

The potential crack in the proverbial dam, Levy pointed out, is the recent flattening of the iPod's growth curve. For the first time in years, players such as SanDisk and Creative have a chance to actually capture more than a point or two of market share. It's these players -- including the ones who are feeling stilted by Microsoft, having just been placed in Ross Rubin's "Better" column against Zune's "Best" -- who will be scrambling ahead of the holiday season, and who will crowd the field for Zune.

Levy believes this is where Microsoft has to rely on its inherent advantage: the obvious one, of course. It's Microsoft. Whereas Creative and its competitors may not have enough capital on hand to sustain a failed product launch, should one ever happen, Microsoft can afford to take its lumps.

In fact, Levy adds, this may actually be Microsoft's strategy: Produce a decent, though not spectacular, player the first or even the second time around. Build alliances with retailers, buy plenty of advertising space, and build up mindshare, if not market share, among the consumer. And then, for the third go-round, bat one out of the park.

"Microsoft is the kind of company that's willing to invest for the long term, and is willing to lose money up-front for awhile, until it establishes its foothold in a given market," he stated, reminding us that the company was willing to lose significant sums with each first-generation and even second-generation Xbox sold, so that it can now be considered a legitimate contender against Sony.

Ten years ago, Microsoft premiered Windows CE in the mobile space, and was panned for pathetically attempting to break into Palm's sacrosanct territory. Today, Windows Mobile 5.0 is running on what reviewers consider the market's most compelling handset: the Palm Treo.

"Microsoft isn't looking at how they're going to perform this holiday season with the Zune," explained Levy. "Certainly they would like it to be well-received, to have solid sales figures, to have an excellent presence and place in the media. But if it doesn't, then Microsoft already has its sights set on next holiday season, and years down the line about the roadmap for this device and the services that surround it."

Jupiter's Gartenberg echoed that sentiment. "Bear in mind that this is a marathon, not a sprint and how Zune does in Q4 doesn't really matter. The key will be how fast they can iterate, rev, and seize control of the message and the marketing," he said. "Or, cede control of digital media to Apple."

"Whereas most other companies view their devices as a chip-shot -- where every device that goes into the market needs to succeed now, otherwise there may not be a next device -- not so the case with Microsoft," concluded Levy. "I think it might be a case of Microsoft holding things back so that they can continue to send a stream of innovation into the market with subsequent releases...In order to accomplish that, they will spend whatever it takes. And let's face it, Microsoft can afford to outspend pretty much all of its competitors in the market, even Apple."

It's plastic, it's a little dumpy looking, it doesn't have a price yet, and it comes in brown. Its primary competitor owns three-fourths of its market. And yet the biggest surprise of all is that its best-case scenario could very well be within the realm of feasibility. Despite our temptations, we cannot yet write off the Zune.