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The Trouble with Zunes

Microsoft rolls out the Zune 3.0. It's no longer brown. But Steve Jobs isn't losing any sleep over it

By Devin Leonard
September 19, 2008: 5:38 PM EDT

The new Zune is cooler than the old Zune, but it might not make a difference.

FORTUNE (New York) -- When Microsoft (MSFT, Fortune 500) introduced the Zune portable music player almost two years ago, even people at the company made light of it. Microsofties called it "the brick." The Zune was larger thanApple's (AAPL, Fortune 500) sleek iPod. It also came in white, black...and brown.

Can you imagine Steve Jobs approving a brown iPod?

Microsoft has gotten clobbered in the marketplace-2.5 millions Zunes sold versus 160 million iPods-but the company isn't giving up.

This week Microsoft unveiled a third generation of Zunes with more features (and more colors: black, red, pink, blue - but no more brown).

The new Zune has even gotten respectable marks from gadget reviewers. Alas, it probably doesnt matter. This Zune no likelier than its forebears to make a dent in the iPod's dominance.

"It's a very uphill battle for Microsoft," says James McQuivey, vice president of Forrester Research. "The iPod just has so much momentum. It's really hard to break that momentum when your most desired customer is someone who already owns one."

No reason to switch

The basic problem is that Microsoft simply hasn't given iPod owners much reason to switch. The competing devices are priced identically. The 80 GB Zune costs $229. So does an 80 GB iPod classic.

There are only so many people willing to spend from $129.99 to $249.99 on the latest MP3 player, and unfortunately for Microsoft, most of them are already on their third or fourth iPod.

Adam Sohn, director of public relations for the Zune, says that music fans will indeed change devices because Microsoft offers features the iPod lacks.

For example, Apple's iTunes store doesn't have a music subscription service. Microsoft touts its $14.99 monthly Zune Pass, which has been enhanced with new music discovery features. But Apple passed on subscriptions for a reason: consumers don't really care for them.

Microsoft doesn't disclose its Zune Pass numbers. But Mike Olson, a technology analyst at Piper Jaffray, estimates Zune Pass has 270,000 monthly customers--a third of RealNetwork (RNWK)'s Rhapsody subscribers. Sohn says Microsoft has only just started to market the service.

What about a built-in FM radio? The iPod doesn't have one of those. The Zune has that plus a "Buy From FM" service--Zune owners can now download songs wirelessly immediately upon hearing them on the device's FM radio tuner.

"Microsoft is the first to implement it," says Clear Channel Radio EVP Jeff Littlejohn. "But we think it will become the standard for FM Radio."

It's a cool idea. But how big a draw is a radio on your MP3 player when you've already loaded it with your favorite tunes?

Another new Zune feature: owners also be able to purchase tracks wirelessly from the Zune Marketplace store from 9,800 participating McDonald's. The fast food chain is targeting Starbuck (SBUX, Fortune 500)'s customers with its own high-ended coffee line. So why shouldn't Microsoft go along for the ride?

Well, maybe because people don't hang out with their computers at McDonald's like they do at Starbucks. "I like the idea," says Eric Schwartz, founder of Foneshow, a mobile phone audio entertainment provider, who blogs about the media. "But honestly, McDonald (MCD, Fortune 500)'s is not a place where you spend a lot of time. That's kind of the point of McDonald's. That's why they call it fast food. People don't want to linger."

Sohn shrugs off such skepticism. "We're pretty happy to light up nearly 10,000 of those locations on launch day," he says. "They do a lot of business. That crowd is enormous."

So is there anything Microsoft could be doing differently? McQuivey pauses before answering. Then he makes a dramatic suggestion: What if Microsoft negotiated a deal for the Zune as the preferred music player of the MySpace Music venture with Amazon (AMZN, Fortune 500)?

Then reality intrudes. "But that would never happen," he says. "The iPod sells like crazy on Amazon." McQuivey is empathetic: "It has to be frustrating if you are working on the Zune team."

Sohn doesn't deny that Microsoft is in an unenviable position with the Zune. But he tries to make the best of it. "In order t obe at all relevant in the conversation, you have to start somewhere," says the Zune spokesman.

True enough. And if Microsoft fails with its latest attempt? There's always the Zune 4.0. To top of page

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