Microsoft's Zune Debuts

Zune music player is Microsoft's latest entertainment foray

(Seattle) Few have accused Microsoft of being first to the market. But plenty have learned the hard way that the company can be very good at sneaking up from behind. That's the tack Microsoft is hoping to take with entertainment. The software maker has invested years of effort and billions of dollars in entertainment endeavors ranging from television technology to video game consoles. What's more, it has said that it's willing to spend much more money, and take much more time, to see if those investments pay off.

Its latest effort, the $249.99 Zune portable player and music service, debuts Tuesday and marks one of the most high-profile attempts to take on Apple Computer Inc.'s iPod and iTunes powerhouse.

Analysts don't expect the early effort to make a serious dent in Apple's market share.

"It's not even going to give the iPod a bad headache for the time being," said analyst Michael Gartenberg with Jupiter Research.

Still, Gartenberg says Microsoft's competitors may have reason to be wary of what the company's deep pockets and dogged persistence could accomplish in years to come.

For Microsoft, which rakes in billions from its highly profitable Office and Windows franchises, it may seem strange to put so much emphasis on digital entertainment businesses where profitability can be much trickier.

But analyst Toan Tran with Morningstar says the company could have little choice but to get into those businesses. That's because entertainment devices, which are now used for everything from storing photos to playing video games and watching movies, are increasingly encroaching into the turf Microsoft has tried to hold onto with the Windows operating system that powers most PCs today.

"Microsoft wants to get into the space because it's a very big market and the PC is not the center of the world anymore," Tran said.

Microsoft says it's grown interested in entertainment because technology now plays a bigger role in the way people do everything from watch television to listen to music. Robbie Bach, president of Microsoft's entertainment and devices division, said that's a change that plays to Microsoft's strengths.

Still, Microsoft has yet to figure out how to make a lot of money at this new game.

While it has earned a following with the Xbox console and its online gameplay service, Xbox Live, the effort is still losing money. It could also take four years or more before the Zune effort is profitable. Overall, Microsoft's entertainment and devices division lost $96 million in the quarter ended Sept. 30.

The Zune launch also follows on the heels of another Microsoft-backed digital music effort, called PlaysForSure.

In an interview Monday, Chief Executive Steve Ballmer said Microsoft will continue to support the companies that make PlaysForSure devices and services. But he said the company decided to also launch its own Zune product, which isn't compatible with PlaysForSure, after seeing that that effort wasn't doing much to temper Apple's momentum.

"We said, if we just keep on our current model, it's unclear that we're going to expand our footprint in these portable devices," Ballmer said.

Microsoft also is hoping to differentiate itself from Apple with Zune's built-in wireless connection, which allows users to share songs with other nearby Zune users. Ballmer said that idea grew out of the success Microsoft has had with Xbox Live, in which a technology became a forum for gamers all over the world to build a community.

Gartenberg, the Jupiter analyst, said cash-rich Microsoft can afford to be persistent and try new ideas in taking on market leaders such as Apple or Sony Corp. It's a luxury available to few other companies, he said.

"They've learned that they can buy market share," he said.

Bach concedes that things like Xbox and Zune will never enjoy the profit margins Microsoft can boast from Windows and Office, but he insists the company is not spending irresponsibly.

"We're not in this just because it's fun to do. We think we can make good money doing this," he said.

For now, however, the expectations are much more restrained. Bach said he'd consider Zune a success this holiday season if people simply decided that Apple had a viable competitor.

"Apple's obviously still going to be the leader. I think that's fair. But we want them to see Microsoft and say, 'These are the guys who are going to give Apple a run for the money," Bach said.

Some users may not realize that Microsoft is behind the effort _ the company's name doesn't appear on the actual gadget. As Microsoft tries to build its entertainment presence, Bach says it's no accident that its own name has been downplayed.

"We have to have something that is relevant to people who are music enthusiasts, and while Microsoft is a great brand name it's, you know, not the first word that comes to your mind when someone says,'Hey, music!'" he said.

Still, the company is upfront about the fact that its high-profile name is part of what has made people notice Zune more than the other iPod competitors.

"The instant viability that we have in the space, if you can call it that, is in large measure a function of the fact that it is Microsoft," said Bryan Lee, corporate vice president for Microsoft's entertainment business.

Microsoft also has made no secret of its eventual goal to more closely intertwine its various entertainment offerings, although it's been murky on the details. In general, Bach said he expects the products to be more closely linked through its Live-branded online services. These offerings span the entire company, and include Xbox Live, the Windows Live Web search effort and an Office Live offering for small businesses.

Microsoft also says it would make sense to link its entertainment offerings more closely with its Windows operating system. Ballmer notes that the company has sold 20 million copies of a version of Windows that is geared toward entertainment, and says that is a big part of the company's overall strategy.

J Allard, corporate vice president for design and development in Microsoft's entertainment and devices division, said the company hasn't offered more details on how its offerings might be linked in part because it would like to wait and see what users ask for, or seem to want.

Even though it's still hard to predict when or how much Microsoft's entertainment investments will pay off for investors, Morningstar analyst Tran said he thinks Microsoft is doing the right thing.

"The name of the game in technology is change, and if Microsoft doesn't invest and adapt they're eventually going to be irrelevant," he said.


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