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Microsoft's New Beat

Microsoft's (MSFT) Xbox 360 gaming console is certainly one of the most sought-after holiday gifts this season. But much to Microsoft's dismay, sales of Apple's (AAPL) iPod are sizzling, too, leaving the digital music devices that use Microsoft technology in the dust (see BW Online, 11/22/05, "Beating the iPod Crunch"). So on Dec. 14, Microsoft tried to apply an Xbox touch to its digital music business.

The new president of Microsoft's Entertainment & Devices division, Robert J. Bach (see BW, 11/28/05, "Robbie Bach is Ready to Rumble"), put key members of his Xbox team in charge of the entertainment businesses.

RISING URGE. In a Dec. 14 internal memo to Microsoft employees, Bach announced that Bryan Lee, the chief financial officer of his games group, will manage the company's music, TV, and video businesses. J Allard, who ran the technical design efforts for both the original Xbox and the Xbox 360, will oversee the design efforts for all of the entertainment businesses.

Despite years of trying, Microsoft's digital music strategy has played second fiddle to Apple. Devices from such partners as Creative Labs (CREAF) and Dell (DELL) barely register sales next to the iPod. And online music services from Napster (NAPS) and Wal-Mart (WMT) haven't slowed Apple's iTunes.

Microsoft added yet another partner on Dec. 13, when MTV (VIA) announced plans to launch its own online music service, called Urge, using the software giant's technology.

"PIONEERING WORK." The reorganization is a sea change for the company, whose digital entertainment strategy has been scattered over three divisions, each of which drove different business agendas. Now, Bach wrote to employees in his Dec. 14 e-mail, his division "will assume responsibility for driving Microsoft's approach to music, TV, and video across the company. Specifically, Bryan's organization will manage the MSN Music and video download business, while J's group will naturally take ownership of the technology and consumer experience in these areas."

Microsoft execs declined to elaborate on Bach's e-mail, which was reviewed by BusinessWeek Online. But in a November interview, Bach hinted that some of the changes may be in the offing.

"We've done a lot of good work, and we've done most of the pioneering work. Did Apple do a better job integrating it and bringing it together? The market says yes. You can't dispute that," Bach said at the time. "What you can do is look at the assets we have and say, 'Can we do better?' We certainly believe we can."

STRATEGIC SYNCHRONICITY. One idea he didn't shoot down: Microsoft building its own digital media device to compete with the iPod. After all, it was Bach's Xbox group that worked with design firms to come up with the elegant, even iPod-esque, design for the Xbox 360 (see BW Online, 11/22/05, "Xbox: How It's Designed to Thrill"). Bach said it was "an option" for Microsoft to build its own device, though he cautioned that doing so could drive Microsoft's partners out of the market and limit consumer choice.

His Dec. 14 e-mail didn't shed any more light on the possibility of a Microsoft-branded iPod rival. Yet he did write that Allard's group would "own the vision, product road map, and execution for end-to-end customer experiences in the digital entertainment space." It's the iPod's end-to-end customer experience -- the seamless meshing of the iPod and the iTunes music service -- that has given Apple so much success. Now, it seems, Bach plans to develop a strategy to rival the synchronicity of Apple's device and service.

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