Microsoft's Zune HD is no iPod killer

The software giant goes back to its roots with its new multi-platform HD portable media player. But its strategy may not have put iPod in its cross hairs -- yet.

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By David Goldman, CNNMoney.com staff writer

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The new Microsoft Zune HD is available on shelves Tuesday.
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NEW YORK (CNNMoney.com) -- Microsoft's Zune HD, which went on sale Tuesday, is more than just another portable media player trying to unseat Apple's iPod.

It's part of Microsoft's new cross-platform media strategy, which focuses on the four screens that consumers watch: TV, portable devices, PCs and the Internet.

Earlier versions of the three-year-old Zune line synched only with a PC, but the new version also works with Xbox and high definition televisions, and will eventually be able to link up with Windows Mobile phones in the coming months.

"Previously with the Zune, we had just been in the MP3 business, but now we have a broader entertainment strategy," said Terry Farrell, senior project manager for the Zune.

The new Zune allows a user to download a movie on Xbox Live, pause it mid-stream, sync wirelessly to the Zune and resume watching it on the go. And if the movie still isn't over, users can sync up with their PC's to watch the rest. (The Zune video store will be available to 20 million Xbox Live subscribers in November.)

The synergies don't end there. All movies will be available in 720p HD, so watching them on a high-def TV using the Zune dock connector makes the picture look as sharp as watching a Blu-ray DVD.

Beyond movies, Microsoft plans to expand its app store, called Zune Marketplace, beyond the dozen or so apps it currently offers. The company's Xbox gaming unit is already working on original games and once the Zune is synched up with Windows Mobile, Microsoft said it will seek out third-party app vendors.

And for the fourth "screen," Zune's Web search is, of course, powered by Bing, Microsoft's new search engine.

iPod will still dominate. Despite selling 30 million Xboxes, and several million Zunes, Microsoft's entertainment division has struggled. The unit has recorded hundreds of millions of dollars of losses in the last two quarters with the Zune managing to carve out a measly 1% share of the portable media device market.

Compare that with the iPod, which holds a 75% share of the portable media device market.

Analysts say Microsoft is heading in the right direction with its new multi-platform strategy, but a challenge to the mighty iPod isn't likely in the cards.

"Microsoft isn't such a great hardware company, but it is, at its heart, a great software company, and there's some pretty innovative software in the Zune," said David Smith, a Microsoft analyst at Gartner. "Though it's hard to see one product making a huge difference, you have to measure the impact of all those different pieces on entire world of phones, video and music."

While Microsoft may not be able to out-iPod the iPod, it may try to out-iTunes Apple's iTunes.

ITunes allows users to buy songs and albums permanently. Microsoft has a different strategy -- the Zune Marketplace -- which allows users to pay for a $14.99 per month subscription, or Zune Pass. That pass allows users to download unlimited songs to their devices as long as they pay the monthly fee but those are not permanent downloads. However, the new version allows Zune users to permanently download up to 10 songs per month.

Zune could nudge out iPod rivals. Other than some nice interactive features in Zune's software and the ability to access HD radio, there's not much else that Microsoft offers that Apple doesn't. Apple (AAPL, Fortune 500) users can rent and buy HD movies on Apple TV, which works with iTunes, which syncs with iPods and iPhones, which connects with Safari. That covers all four "screens" that Microsoft's new strategy encompasses.

The similarities to the market leader may not get many iPod users to change sides, but that may not be a bad thing. In fact, it could work to Microsoft's advantage in fending off non-Apple rivals for the 25% market share that the iPod doesn't dominate.

"Everyone focuses on how Zune can take on the iPod, but there is still a huge 25% of the market that is open," said Sonal Gandhi, music analyst with Forrester Research. "With the Zune, Microsoft is trying not only to go up against the touch, but also Sony's (SNE) Walkman and other devices in that 25%."

Gandhi said Microsoft real chance to succeed lies in challenging those other non-iPod devices, and it may have come up with the right device to do it.

"It's definitely a nice attempt by Microsoft," said Gandhi. "People experience music in different places, and the Zune fits well with all the other products that Microsoft has. It gives you a seamless experience no matter where you are -- in general, that's where we think the market is going." To top of page

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