Sure, Microsoft's music player will build a base, even among some iPod users—but it can't hold a candle to the iPod in the way that matters most
As much as I like my iPod—I've owned three or four over the years—I've had to come to terms with the unpleasant fact that not everyone does.
My best friend is one of those people. His music player is a little Creative (CREAF) Muvo and there's nothing that I or Apple Computer (AAPL) can do or say to change his mind. I went so far as to give him an iPod nano. He gave it to his girlfriend. So much for proselytizing.
After five years of pummeling us with the iPod and its associated iTunes music service and some 3,000 accessories, Apple is poised to face what some might say is its first real challenger. And that challenger is Microsoft's digital music player, Zune, which is poised to hit the market on Nov. 14 with the express intent of encroaching on Apple's turf.
You Can't Discount Microsoft
I can't fault Microsoft (MSFT) for envying Apple's success. (And it's not exactly the first time that Microsoft has looked on enviously at something that Apple does.) Even for Microsoft, which took in $44.6 billion in revenue in the most recent fiscal year, a product that brings in $7.6 billion in sales a year is nothing to sneeze at. Over five years, Apple has sold nearly 70 million iPods worth nearly $14 billion—all that at gross margin estimated to be at or near 50%.
So does the Zune have a chance? I've learned over time it's not wise to discount Microsoft. I thought little of the Xbox game console only to watch it grow in popularity and spawn the Xbox 360, which is also doing well. With the consoles, Microsoft proved its willingness to take a financial loss over time to establish a market beachhead (see BusinessWeek.com, 11/22/05, "Microsoft's Red Ink Game"), which is something Apple doesn't traditionally do—and certainly couldn't afford to do when the iPod launched.
The financial dynamics for the Zune are inherently different. Microsoft can't realistically sell a $249 Zune at a loss and expect to recoup losses on music sales. As successful as iTunes is in helping Apple sell iPods, it's not that impressive when you compare the music service to sales of the hardware. Yes, Apple has sold 1.5 billion songs since the launch of the iTunes store in spring 2003—but that averages only 22 songs per iPod sold during the same period.
Wi-Fi Sets Zune Apart
I haven't played with a Zune yet (though I intend to). But so far, the device doesn't have much to offer compared with the iPod. It will come in only one storage capacity, and that isn't all that high, especially when you consider that it's intended to play a mix of music and video. The Zune won't have all that many accessories, won't integrate with any cars, and doesn't support any language other than English.
So what does Zune offer the potential iPod-hater beyond the fact that it's not an iPod? For one, there's wireless connectivity. Zune users will be able to share songs directly from one device to the other, and maybe down the road, there are some other scenarios that might make Wi-Fi access worthwhile, like streaming audio from the Internet (which can already be done with some wireless phones).
But how many times a day do you really feel like sharing a song that's playing on your personal player with someone else? It's almost more efficient, and more permanent given the "3-play 3-day" limitations on playing shared songs I've been hearing about, to burn a CD and give that to your friend.
Apple Customers' Loyalty in Doubt
In many ways it will be the same. The Zune will be tied to a single music store, the Zune Marketplace, and will be cutting RealNetworks' (RNWK) Rhapsody, Napster (NAPS), and others out of its little ecosystem, just at a time when it's increasingly clear to me that for the digital music market to grow, closed ecosystems like this will have to move toward interoperability (see BusinessWeek.com, 10/25/06, "Apple, Tear Down This Wall").
While Mac owners tend to be iPod owners too, and there's a good deal of evidence that owning an iPod tends to encourage switching away from Windows and to the Mac (see BusinessWeek.com, 6/15/06, "Apple's Growing Bite of the Market "), there's at least some evidence that consumers who own iPods don't necessarily bear terribly strong loyalties toward the product over the long term.
ABI Research recently found that of 1,725 adults surveyed, 58% of those who already own an iPod or other MP3 player said they'd consider buying a Zune in the next 12 months, after hearing about its features. Mind you, people don't always behave in real life the way they say they will in surveys.
For the Curious and the Haters
Additionally, I have problems with the methodology of the survey. I asked ABI analyst Steve Wilson if the results accounted for Mac users vs. Windows users. He said respondents were asked what kind of computer they used, but that the results were more or less equally distributed among them. But it's hard for me to imagine a self-aware Mac user who would consider a Zune as more or less equal to an iPod, mainly because the Zune won't work with a Mac. Still, I think the research suggests there's a market opening for Microsoft to exploit, but I'd argue that it's nowhere near as high as Wilson suggests.
There are some iPod owners—some frustrated, some simply curious, but all ready to try something different—who will try the Zune. And then there are the iPod-haters, like my friend mentioned above. For them, the best thing the Zune has to offer a potential consumer is that it doesn't bear the iPod name or the Apple logo.
And yet the iPod remains the hugely successful product, outshining its nearest competitors, such as Sandisk (SNDK), Creative, Samsung, Cowon, and others. And here is the reason I think the Zune will remain at a huge disadvantage: the cool factor.
Violating the Rules of Cool
Remember the three rules of cool, as documented by Malcolm Gladwell in The New Yorker almost a decade ago. First: The act of discovering cool causes cool to move on. If you accept that the iPod is still cool, as many still do, then the Zune can't help but seem an arriviste, an interloper, poseur product encroaching on well-defined "cool" territory. When the uncool discover a cool place, the cool take their business elsewhere. Microsoft's a little light on the cool bona fides, despite the Xbox 360.
The Zune will seem a not-pod, proving the second rule of cool: It cannot be manufactured, only observed, and then by those who are themselves cool. An iPod is a requisite accoutrement of cool. This is the result of a carefully constructed marketing effort on Apple's part. Any attempt that Microsoft makes to market the Zune will fall short of the high bar set by Apple, which has an almost natural sense for turning its ads into entertainment. Describe for me three Apple TV ads you remember from the last two years. Now, try to describe for me three Microsoft ads. Bet you can't. That's the Apple marketing machine at work.
Finally, there's the third rule of cool: You have to be cool to know cool. And since when is Microsoft cool? The iPod was cool from birth. The Zune will be seen for what it is: a me-too product that is expressing Microsoft's envy at not being cool. It will carve out its own niche of the market, but by this time next year, it will be considered a dismal failure.