More innovation than imitation Microsoft sets sights on market leader iPod with its new Zune

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A few months ago, Harvey Chute started Zunerama.com, where he has been posting news, intelligence, speculation, photos — whatever — about Microsoft's new Zune device. His is one of about 50 blogs dedicated to the product, which doesn't even launch until Tuesday. Last week Chute, a software developer not affiliated with Microsoft, flew from his home outside Seattle to an invitation-only event in Los Angeles just to get a sneak peek at Zune.

What inspires such devotion to an untested digital music player? Part of it, Chute said, is a need to see someone — anyone, really — challenge iPod's dominance in the category. The fact that this particular challenge comes from the world's biggest software company and a longtime Apple nemesis adds to the drama.

"I feared it will flub, and that it would turn iPod into an even bigger monopoly," Chute said after playing with Zune.

Not an unfounded concern. Apple has a 75% share of portable music players, according to research firm NPD, followed by SanDisk (10%), Creative (4%), Samsung (2%) and Sony (2%).

Zune is a $249 player with a capacity for 30GB of music, videos and photos, so it is a direct competitor to one of the larger of several iPods that is similarly priced. Zune, though, boasts a bigger and better screen, suggesting that video will play a large role in Zune's future, but not when it launches Tuesday.

"The primary function of the device is music," Zune product manager Matt Jubelirer said.

While product reviewers nationwide will no doubt climb into Zune's every nook and cranny to see how it stacks up against the iPod for sound quality, battery life, interface and every other detail, a few things about the product immediately stand out. One, a built-in FM radio, is an old-school way for consumers to quickly tune into breaking news. The other is a high-tech way for sharing music on one Zune device with other Zunes nearby.

It's that latter technology that's the attention-getter. Here's the premise: Like Apple's iTunes online music store, Zune has what it calls a Marketplace at Zune.net, which also launches Tuesday. There, consumers buy music with Microsoft "points" for the equivalent of about 99 cents per song.

Most songs, albums and playlists purchased can be wirelessly zapped from one Zune player to another, as long as it's not more than about 30 feet away. The zapped songs reside on the recipient's Zune for three days or three plays, which ever comes first. Microsoft and its music label partners, of course, hope that many will choose to purchase their shared music rather than let it fade away.

Not all rights holders have embraced the notion of sharing digital music files, and the Zune Marketplace doesn't specify the music that can and cannot be shared, so buyer beware. Without offering details, Jubelirer said that more than half of the 2 million songs at Zune.net can be shared.

Analysts seem guardedly optimistic about the scheme.

"It will take a while, even under the best circumstances, for the installed base to be large enough to encourage the kind of casual music-sharing Microsoft envisions," NPD's Ross Rubin said.

Also different from iTunes is a subscription model. For $14.99 a month, subscribers to Zune Pass have access to all the music at the site. But because they are renters and not buyers, the music stops when the subscription is canceled, like with competing offerings from Rhapsody and Napster.

Subscription, while a tiny subsection of the digital music market now, is expected to grow from a $149 million business last year in the U.S. to $1.2 billion in 2010, according to PricewaterhouseCoopers.

Much of the same team that put Microsoft's Xbox video game platform on the map also are behind Zune, more proof that Zune ultimately will be a visual experience.

"The more important video becomes on portable devices, the more disruptive it is to Apple's dominance," Forrester Research analyst Josh Bernoff said.

Bernoff said Microsoft is desperately jealous of Apple. "It's a personal offense that any other company is in a position to be successful with interactive devices," he said.

Early data shows that Microsoft might be on the right track. According to a survey from ABI Research, 58% of iPod owners are "somewhat likely" or "extremely likely" to choose a Zune when they next buy a hand-held digital music player.

Microsoft is protective of its plans for Zune, though Scott Erickson, Zune's senior director of product management, hinted that not only video but also satellite radio could be in its future.

"We're definitely in talks with all providers," he said.

And what about the verdict from Chute, the Zunerama blogger who worried about a Microsoft flub? "Zune won't unseat iPod any time soon," he said. "But it will spawn a lot of innovation."

Indeed, Microsoft said last week that it would give Universal Music Group a piece of the revenue generated by Zune device sales, not just from UMG songs that are sold. More such innovative arrangements might be forthcoming.

"We're really doing something good here for the music industry," Jubelirer said.
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