Zune looks to be 'relevant No. 2'

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Microsoft Corp. unveiled its Zune digital music player last week, hoping to grab some market share from Apple and its dominant iPod. Microsoft is positioning Zune as a "social" device, emphasizing that its users can share songs from one Zune to another. Responsible for the Zune project is Microsoft general manager of global marketing for entertainment Chris Stephenson, a former executive with MTV, House of Blues and other music entities. He recently spoke with The Hollywood Reporter West Coast business editor Paul Bond.

The Hollywood Reporter: You have said that Zune will change the category of digital music. How?

Chris Stephenson: Through wireless. The category is now connected.

THR: Why will consumers care?

Stephenson: We hear all the time from consumers that they want to get rid of wires. And new promotional mechanics around this are key for the industry.

THR: Do you have data that proves people want to share music wirelessly with each other through their Zune devices?

Stephenson: Really strong customer research. The whole idea of wireless is that we can constantly upgrade through updates. We'll add future wireless functionality and concepts through the wireless platform.

THR: Some music bought at Zune.net can be shared and some can't. Why are some labels balking at the concept of people sharing music with each other?

Stephenson: Generally, there's really positive support. The digital entertainment business is going through so many changes and different publishers and labels are in different stages of their thinking. Our objective is to have all labels and publishers on board.

THR: Can you share your plans for video?

Stephenson: We focused on music for the moment, so we didn't launch with video, but we are talking with Hollywood, and as soon as we have announcements we'll make them.

THR: Are people clamoring to watch video on tiny devices like Zune and iPod?

Stephenson: It's a great question. Our research so far indicates consumers are more interested in the cool stuff they find online, like podcasts, user-generated content, music videos. Shortform content is of great interest. Obviously there's a growing muddle around TV shows and, more recently, films. All of those categories are interesting to us and we'll be watching carefully over the next month as we formulate our long-term strategy around video.

THR: That being said, why can't I enjoy YouTube videos on a Zune yet?

Stephenson: You can't download YouTube videos. Anywhere you can download stuff directly to your computer, Zune will recognize it and import it straight away. The only things not available have protected digital rights management around it. If YouTube video were downloadable, that would be interesting. Clearly.

THR: What happened to the DJ mode I heard about, where several people with Zunes can listen to the same song simultaneously?

Stephenson: Like I said previously, the wireless platform allows us to add numerous features. DJ-ing is definitely a very exciting part of the roadmap.

THR: IPod has a 75% market share. How do you intend on breaking that near-monopoly?

Stephenson: I think it's 78%, actually. The most important thing here is to be a relevant No. 2. It's absolutely what our goal is. IPod has created a tremendous market position. They've defined this market.

THR: You have also embraced the subscription-music model. What kind of data do you have suggesting people might want this?

Stephenson: We know from the people who have engaged in subscription services that there's a very high element of satisfaction. I think the reason subscription hasn't taken off is that, quite frankly, it hasn't been offered to people in a simple way that they really understand. Zune will be the most important subscription play so far.

THR: Any plans on making Zune a phone or a satellite radio?

Stephenson: Zune is a family of devices, no doubt about that, but we have nothing to announce around phones or satellite radio now. Digital, connected entertainment will evolve and who knows what devices it will be in the future.

THR: There's been a lot of speculation about Xbox playing a big part in Zune. Can you shed some light?

Stephenson: Xbox and Zune are brother and sister. Over time, there will be more integration. There's already the "point" system that lets Xbox and Zune users enjoy their services with one account.

THR: You're giving a portion of Zune device sales to Universal Music Group. Why just that label?

Stephenson: Not just that label. We've announced a deal with UMG, but we're offering similar relationships to the other major and independent labels. Our vision is pretty much that all artists get paid.

THR: If you're sharing so much revenue with so many parties, how does Microsoft make money from Zune sales?

Stephenson: We very carefully built our economic model and overall investment strategy for the long term. Clearly, it makes sense from our own revenue objectives.

THR: IPod is seen as cool and Microsoft as a stodgy, behemoth of a software company. How do you make Microsoft cool again?

Stephenson: We're building a brand with an individual personality. We were very successful with how we did that with Xbox. And, yours is an interesting comment, because if people know that something is backed by Microsoft, that gives it a solid strength. People know it won't go away. That it will grow and be supported aggressively and have the best software, hardware and value for money.
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