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Market research firm Current Analysis, has released results on how Microsoft's digital music player Zune has fared in the market. According to the results, Zune could not get into the top ten list of music players sold during the holiday season in the United States.

According to the research, iPod remained the number one device. Apple accounted for 64 per cent of digital audio devices sold during the period, Sandisk for 22 per cent and Microsoft for 3 per cent.

Microsoft Zune Marketplace Vs. Apple's iTunes

Zune devices come preloaded with music from record labels including DTS, EMI Music's Astralwerks Records and Virgin Records, Ninja Tune, Playlouderecordings, Quango Music Group, Sub Pop Records, and V2/Artemis Records.

If the Zune store sports easy usability features like iTunes, offers an impressive and flexible array of content for Zune owners, and if it evolves to have different kinds of video and audio media available similar to iTunes, the Zune marketplace has the potential to become a decent competitor to the Apple iTunes universe, this was the viewpoint of Microsoft when the device was launched in November.

It’s All About the Music

While video has grabbed the digital media spotlight in recent days—Seattle-based online retailer Amazon.com announced a movie downloading service—Microsoft made clear that despite Zune's ample screen, this player is about the music.

"When we decided to approach this thing, we decided to celebrate the experience of music," said Bryan Lee, the Microsoft entertainment executive.

The device plays videos, even orienting the playback in landscape format to take advantage of the larger screen. But the focus is on content that complements the music, such as album covers and music videos. No television episodes, movies or other video content available through services including iTunes will be sold on the Zune Marketplace, at least initially, Lee said.

Microsoft's music-focused approach extends to its marketing of Zune. The company plans to promote the platform with emerging and independent artists, such as Band of Horses and CSS, a Brazilian group whose tour is sponsored by Zune, said Chris Stephenson, a former recording-industry executive who joined Microsoft in March as its general manager of global marketing.

"We're not going to have the big advertising campaign on Sunset Boulevard, connected to major artists, we're not doing that," Stephenson said. "We're helping artists grow."

He added that the Zune Marketplace would debut with more than two million songs and feature big-name artists, which he called the industry's "bread and butter." Microsoft is preloading music from many of the major record labels on Zune devices.

The company also plans to help unsigned musicians get their content on Zune Marketplace, he said.

Zune marketing will trade on Seattle's prominent place in the music industry.

Like Stephenson, several members of the Zune team have recording-industry experience. There are about 170 people working on the project in Redmond, Washington though the group draws on expertise from all over the company, he said.

"Zune is much closer to a record company than a software or hardware company right now," said Rob Enderle, principal analyst with the Enderle Group. "That gives Microsoft a skill set that is unmatched, including with Apple, in terms of the market."

Social Networking & Inter-connectivity Sets Microsoft Zune Apart from Apple's iPod

Microsoft's digital media player with a twist may have just stolen the thunder from Apple's iPod with its unique social networking feature. Dubbed the "iPod killer" by blogwatchers and industry watchers alike since the time of its announcement, the two features that could indeed establish Zune as the 'iPod killer' is its social networking capability and the ability to connect across a network of devices.

Zune's social networking capability will be based in Zune Marketplace. Zune will, in the near future, be able to connect across to the Microsoft PC, Xbox, television, and so on, thus taking a lead over Apple's inter-connection plans with iTV (announced earlier this week). "We feel that music is inherently social. The ability to share music from device to device allows people to discover new options/new experiences, and that is very important. That is how we are going to change the current digital media space.” Stephenson said.

Zune Receives Mixed Reviews

Joseph Wilcox, a senior analyst and Microsoft expert at Jupiter Research says, "Music sharing is one of the differentiating features. I find the approach surprisingly consistent with some other stuff coming out of Microsoft ... Several people have asked me the same question this afternoon. So, I want to ask the question here to Microsoft. Brown? I think if I were buying, I'd buy brown. I like brown ... I have a ton of brown clothes. I think the colour is going to matter a lot less than if they had a lot of cool peripherals. What are the default headphones going to look like, for example? The iPod headphones are not good at all. The bigger screen is nice, too."

Mary Jo Foley, from Microsoft Watch said regarding Zune’s sharing features, "I liked it better when I could dub a tape for a friend, or loan them the CD for a while. This is more like forced marketing, with advanced DRM. How long till spyware starts showing up in the code?"

On the other hand, Glenn Peoples, a music critic said, "I don't get it. Should I be using Napster, URGE, or Zune? Should I be using the Clix or the Zune? Should I be using Windows Media Player 11 or the Zune Marketplace software? There are too many choices, many of which are not interoperable, coming to me from the same company: Microsoft. Instead of simplifying the market, they've made it slightly more complicated with Zune"

Chris Pirillo, a technology pundit said, "Clearly all the data isn't in yet, but this definitely pushes the MP3 player out of the pocket and into the realm of social networking. The question, obviously, is what is Apple going to do about this and, as a corollary, how low Apple and Creative shares are selling as we speak? Perhaps MS could create a 'Zune Inside' logo for those guys? Or maybe fund a halfway house for under connected MP3 players? "

Behind the strategy, Microsoft's looking for new growth engines in consumer electronics, analysts said. Although the Xbox 360 game console proved an expensive endeavour, the company continues to look for next big trick. Senior vice president and chief equity strategist Robert Toomey at Seattle-based E. K. Riley Advisors calls the announcement another step in a broad strategy for Microsoft to build out its entertainment division.

Toomey also believes Microsoft has an uphill battle against Apple in consumer market, but success will come if they can position "Zune as one of many software-driven products in Microsoft's overarching strategy to expand in the home entertainment and consumer market," he said. "As more computing moves to the Internet and small digital devices, Microsoft needs to be there to drive growth in the profitable software business."

Credit Suisse analyst Jason Maynard said it could take time for Microsoft to catch up to Apple's three-year lead, but interesting Zune features that caught his eye are the FM tuner and Wi-Fi capabilities.

Analysts found plenty to pick at with the Zune system as well, "It is not an iPod killer," said Aram Sinnreich, managing partner at Radar Research, echoing the criticisms of other analysts. "The incremental value presented by the sharing features and the Wi-Fi are simply not great enough to overcome the incredible marketing and social cachet of the iPod."

Apple's power to excite the industry, diminish the importance of features its line doesn't offer and play up the benefits of those it does will test Microsoft's marketing, analysts said.

One example is how Apple Chief Executive Steve Jobs set the tech industry buzzing in advance of his announcement Tuesday that the iTunes store would offer movie downloads. He also showed off a set-top box, still in development, that would allow users to stream digital content from the computer to the television.

The Road Ahead

In November 2006, Analysts did not expect profits to come from the hardware, but rather software and on-going services that tie the media player into Microsoft's home media centre through Vista. "I don't think the hardware will become an attractive business," said Walter Pritchard, senior analyst, Institutional Research, Cowen and Company LLC. "The sale of download music hasn't really done much for Apple's iPod business."

And as devices converge into one multimedia platform, some speculate Zune could become the first step toward a cellular phone-like device that would encompass all features. It wouldn't surprise Pritchard to see Microsoft merge Windows mobile and Zune, but he said it's easier to convince people to use their phone as another device, rather then using their music device as a phone.

Microsoft could eventually build a development community around the Zune brand that would allow software developers to create downloadable application, agrees Mark Murphy, managing director at equity research firm First Albany. "There are technical details that aren't known yet about the exact specifications on the hardware," he said. "It looks like more of a software approach, which leaves many options open."

Murphy said look at Microsoft's approach to Xbox 360 that allows gamers to connect and share information, and it becomes apparent to the approach they will take with Zune.

Analysts were fairly positive on the media player's success. But ask Murphy his thoughts on the branded name and you'll likely get another reaction. "I don't think the name is the zippiest thing out there," he said. "The Zune only has one syllable. Most of the names have two: X-box, Walkman, but I guess it will work."

Microsoft's financial investment in Zune is considerable, and it's not something top executives expect to pay off immediately.

Bach tried to set realistic expectations about Zune and its underdog status. "This not a six-month initiative, and somehow in six months we're going to have captured the marketplace," he said at the time. "This is something that's going to be a three-, four-, five-year investment horizon."



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