Nov. 13 (Bloomberg) -- Microsoft Corp. plans to add a video-sharing feature to its Zune player and will eventually sell a model that combines the device with a phone, Chief Executive Officer Steve Ballmer said.

The video function would probably be used to transfer content created by Zune customers, Ballmer said in an interview today from Redmond, Washington. He declined to comment on when Microsoft, the world's largest software maker, would add video sharing or announce a phone model.

Zune goes on sale tomorrow for $249.99 as Microsoft tries to break into the $4 billion U.S. market for portable music devices. Ballmer pointed to Zune's wireless connection, currently used for music sharing, as an advantage over Apple Computer Inc.'s iPod, which has 75 percent of U.S. sales. New features will help Microsoft keep pace with Apple, he said.

``The race is on,'' he said. ``I'm confident we can keep up. They have brand and image going for them, and we have some innovative ideas.''

Microsoft Chairman Bill Gates gave his Zune, a brown model, to an audience member at an outdoor concert by rock group Secret Machines in downtown Seattle today to mark the product's release. Similar shows are being held tonight in New York, Los Angeles, Atlanta, Chicago and Miami.

``Zune is a big investment for us,'' said Gates, who called the device ``very cool.''

Microsoft shares rose 11 cents to $29.35, their highest in two years, in Nasdaq Stock Market composite trading today.

New iPods

Apple will probably introduce a new video iPod with a larger screen than the current 2.5-inch model as early as January and enter the mobile-phone market with an iPod phone in 2007, said UBS AG's Benjamin Reitzes in New York.

A JupiterResearch study last month showed cellular phones with the ability to play digital music aren't generating a lot of usage because few customers are interested in downloading music over the air and the phones don't let users load existing digital music collections, according to analyst David Card.

A phone that lets customers load their existing music in a similar way to iPod or Zune devices could have more success, Card said.

Ballmer said it would be easier to combine phone features into a device that just plays music. The current Zune's three- inch video screen would make a phone larger than many customers want, he said.

Microsoft will use the first version of Zune and its wireless connection as a basis to add more features to attract customers and take on Apple's iPod, Ballmer said.

``We really have the foundation here to ship more and more opportunity to enjoy entertainment experiences,'' Ballmer said.

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

Last Updated: November 13, 2006 17:56 EST