For the past three years, Microsoft's (MSFT) Zune has chased Apple's (AAPL) iPod. It has been a hopeless race in which the Zune, despite an attractive design, aggressive pricing, and a decent music service, has never won more than a minuscule share of the market. Microsoft, nothing if not persistent, is hoping to change the game with its newest Zune by exploiting links to the one big success story from its Mobile & Entertainment Devices group: the Xbox. You share downloaded movies and TV shows between the Zune and the Xbox, but more important, the new Zune HD could be a game machine. Unfortunately, we'll have to wait for Microsoft and its partners to provide some actual games and other applications before we can judge the potential of the excellent hardware.
In theory, at least, connecting the Xbox community to the Zune HD (named for high-definition video capability and HD FM radio) creates a bond with 30 million households that have purchased the game consoles. Two-thirds of them have active accounts with Xbox Live, a subscription service that lets members buy or rent movies and TV shows through Netflix (NFLX) and from the Xbox Live Video Marketplace, which Microsoft rebranded the Zune Marketplace. Xbox Live also provides access to Facebook, Twitter, and YouTube (GOOG). The Apple TV set-top box offers some of these capabilities, but its sales have been a fraction of the Xbox's.
The Zune HD ($220 for 16 gigabytes, $290 for 32) is quite an attractive piece of hardware, a bit smaller, thinner, and lighter than an iPod Touch. Its most striking feature is a gorgeous 3.2-in. touchscreen display based on organic light-emitting diodes, a technology just moving from screens in cameras and phones to larger displays.
Hardware, however, isn't the point. The Zune HD, no matter how spiffy, is not going to beat the iPod straight up as a media player. Apple is largely standing pat with its iPod lineup for the holiday season, but it has trimmed prices on the Touch, undercutting the 16 GB Zune HD by $30. It's also matching some of the Zune's best new features. Before Microsoft could even announce its Smart DJ, which combs through your music to create a continuous playlist of songs similar to those by an artist you have selected, Apple came up with the Genius playlist, which does more or less the same thing. For subscribers to Microsoft's $14.95-a-month Zune Pass service, those songs come not only from your collection but from the entire Zune catalog, something Apple, which disdains subscription music, can't offer.
The Touch, which is really a Wi-Fi-only iPhone without the phone, is far more than a music and video player: The thousands of apps available from the iTunes Store make it a versatile handheld computer—and an excellent game platform.
The big question is whether the Zune might grow up to match and even beat the iPhone and Touch if software developers give it programs that show off its powerful hardware. Games could be the secret weapon if Microsoft can get developers, including its own Game Studios, to create Zune versions of successful Xbox titles. In fact, with its great display, motion sensing, and a speedy Nvidia (NVDA) Tegra processor, the Zune HD could be the best handheld game platform out there. Microsoft promises games, including Project Gotham Racing from Microsoft Game Studios. But as of the Sept. 15 launch in the U.S., apps were limited to a handful of casual games and a calculator.
The battle for music players is over. Game, set, and match to Apple. We have moved into a new round of competition involving much more powerful and versatile devices. Apple has a big lead and will be tough to catch in this market, too. Microsoft at last has built a worthy contender, but it will have to move faster on the software side to have a fighting chance.