Oct. 3 (Bloomberg) -- Microsoft Corp. will unveil smaller versions of its Zune media player that the company says will vault it to second place in the market and take sales from Apple Inc.'s dominant iPod.

The new Zunes, which use a type of memory called flash, will go on sale in mid-November at $149 for a 4-gigabyte device and $199 for an 8-gigabyte model, Vice President J Allard said in a briefing yesterday. Microsoft also expanded the capacity of the original Zune and made it smaller.

Microsoft was the fourth-biggest seller of portable digital players in the first half with 3 percent of the market, compared with Apple's 71 percent, according to NPD Group Inc. in Port Washington, New York. Microsoft, the world's largest software maker, sold 1.2 million Zunes between their November release and June, less than 3 percent of the iPod's sales in the same time.

``If they are willing to spend the time on marketing and evangelizing, they have a good shot at a strong No. 2,'' said Michael Gartenberg, an analyst at JupiterResearch in New York. ``It's really important to put away the other competitors, set up a confrontation with Apple for 2009, and hope that Apple screws up in a major way.''

Microsoft upgraded the original hard-drive Zune model to 80 gigabytes of memory and a 3.2-inch screen, while cutting the size 27 percent, Allard said.

As for this Christmas, the new versions won't help Microsoft gain significant ground on Apple, said Van Baker, an analyst with Gartner Inc. in San Jose, California. The current second-biggest competitor, SanDisk Corp., isn't standing still either, he said.

Second Place

Robbie Bach, president of the division that includes Zune, pledges a second-place position for the device by the end of Christmas. He won't say how many Zunes Redmond, Washington-based Microsoft will sell. At least two-thirds of them will probably be the new flash-based machines, Bach said.

``When we're done with the holiday, people will look and say, `There's Apple and there's Microsoft,''' he said. ``The reality of the numerics are that Apple will still be No. 1.''

Microsoft shares fell 25 cents to $29.45 at 4 p.m. New York time in Nasdaq Stock Market trading. They have fallen 1.4 percent this year.

To compete, Microsoft rebuilt Zune's software from the ground up because the last version was hard to use and slow in handling some tasks, Bach said. The company also slimmed down the machines, which were ``a little too big and cubic,'' he said.

Microsoft declined to disclose the specific sale date for the new models. Amazon.com Inc. is listing them as available on Nov. 13.

Flash Memory

The new models rely on flash memory, a type of storage that doesn't have moving parts. The hard-drive model, which reads data from a spinning disk, costs $249.

The new devices can use their Wi-Fi connection to automatically synchronize music, photos, videos and audio clips with personal computers in homes that have a wireless network. The company also has relaxed rules for sharing songs between Zunes to let users pass along music they get from someone else.

In the past, shared songs expired after three days or three plays. Now it's just three plays.

The flash players come in black, green, red and pink in a design reminiscent of Apple's older iPod Nano device. The Zune uses a button shaped like a squared-off circle for scrolling. Flicking a finger scrolls quickly, while a click moves one entry at a time.

Apple last month introduced thinner Nanos at the same price as the comparable Zune models. The iPod Touch, a video iPod with the same touch-screen display as the iPhone mobile phone, features a 3.5-inch color screen, Wi-Fi and an Internet browser.

`Moving Target'

``Apple is a moving target,'' Baker said. ``Every time someone says we can make a product that's competitive with Apple, guess what, that product isn't there anymore.''

Microsoft is adding songs without copy protection to its music store, a move Apple made with tunes from EMI Group Plc. One-third of the 3 million tracks in the Zune Marketplace will be free of the protections. Microsoft declined to say how much the songs will cost or which record labels will participate.

The Zune Marketplace also will start selling music videos. It still doesn't offer the TV shows and movies found on Apple's iTunes store.

Microsoft is adding a social-networking Web site that shows what users' play on their Zunes. The company will begin testing the Zune Social page next month and plans a feature that posts the information on blogs and sites such as Facebook and MySpace.

``Microsoft's technology is pretty good,'' Gartenberg said. ``The challenge is marketing, so that you can be seen using a Zune and not have to hide in a corner.''

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

Last Updated: October 3, 2007 17:38 EDT