Coming Soon: A New Zune

The next version of Microsoft's music player won't make any serious iPod inroads, but Zune holds a key role in bigger company ambitions

Expectations ran low when Microsoft (MSFT) launched its Zune digital music player last holiday season. No wonder, considering the ease with which Apple's (AAPL) hugely popular iPod vanquished all rivals. As it happens, Zune was no exception. The device has sold a paltry 1.2 million units. Apple sold 21.1 million iPods during the holidays alone.

Given such overwhelming odds, you could forgive Microsoft if it simply walked away from this market. But the software giant unveiled a new batch of Zunes and some tweaks to the software that powers the device in time for the upcoming holiday season.

Distant Vision

In mid-November, the company will roll out three new players. The $249 Zune 80 is the biggest, capable of holding 20,000 songs. The Zune 8 will run $199 and hold 2,000 songs. And the $149 Zune 4 will hold 975 songs. The Zune 80 comes in black, while the smaller units come in black, red, green, and pink. "It's a nice evolutionary update," says Michael Gartenberg, vice-president and research director with Jupiter Research. "They certainly are covering the product line right now much more completely."

The devices don't have a touch screen à la the new iPod touch. But they include something Microsoft calls a Zune Pad, a surface that enables touch navigation.

Microsoft is sticking with the Zune because music is a crucial piece of the company's bid to maintain dominance of the software market as entertainment becomes increasingly digital. Microsoft wants to weave music with video games and movies so that they can be played across a family of devices that use Microsoft software. "We are very committed to this space," says Microsoft Chairman Bill Gates. Yet he also concedes, "There's a long ways to go to achieve the full vision."

No Phone

That's why the company continues to plug away even as Apple comes out with ever more innovative versions (BusinessWeek, 9/6/07) of its iPod. To be fair, Zune hit Microsoft's projections in its first year. Through the fiscal year that ended June 30, Microsoft sold 1.2 million devices, 20% more than it expected. That put it in (an albeit distant) second place to the iPod among music devices with hard drives.

J Allard, vice-president of design and development in Microsoft's Entertainment and Devices Division, launched Microsoft's Xbox video game console business and sees similarities (BusinessWeek, 12/4/06) in the music business. After one year, the Xbox badly trailed Sony's (SNE) PlayStation 2. But now, seven years in, the new Xbox 360 leads a foundering PlayStation 3. "The key word here is patience," Allard says. "Our vision is to redesign the experience."

Still, the new features will likely do little to slow the iPod's march. As nifty as the Zune Pad might be, it doesn't have a touch screen like the newest breed of iPods. The most capacious Zune is still half the size of Apple's 160-gigabyte iPod, and the smallest is still more than twice as bulky as the iPod shuffle. And there's no Zune phone.

More Music, Plus TV

But Zune will have a few interesting features that iPods lack. The devices will still have the wireless connectivity, present in the original units, that lets Zune users share music with each other. Microsoft has added the ability to sync music to the device wirelessly, so users can update their devices without having to park them in a dock next to their PCs.

The company has also given users a bit more flexibility when it comes to sharing music. Originally, Zune users could beam songs to other Zune users. But the recipients could only play those songs for three plays or three days, whichever came first.

Now they'll still only get three plays, but the songs will never time out.

Microsoft says it's also adding 1 million songs without copy protection to the Zune Marketplace, the online store that connects to Zune players. The company wouldn't name the labels that are contributing the music, but Allard says they include "headline content." Both Universal Music and EMI Music Publishing have recently provided music without copy protection to online stores.

The store itself also gets a facelift, with a cleaner look. It now includes a beefy section of artist influences intended to help users discover new tunes. Unlike iTunes, there aren't any downloadable movies or TV shows, though users can buy music videos. But Zune can now connect to PCs that run Windows Media Center, which can record TV programs. So it's possible to get any TV content without an additional charge.

Low Expectations

Perhaps the weakest piece of Zune's business since launch has been the software to which the device connects on PCs. For large music collections, it's painfully slow, sucking up computer resources as users configure and navigate their tunes. Allard acknowledges the problem. "We heard that from a lot of folks," Allard says. "So we started from scratch." In demonstrations, the new software is much peppier, snapping from one artist to the next.

Microsoft also unveiled Zune Social, an online community where folks can keep tabs on the music others are playing. Each page will have something called a Zune Card, which includes users' online names along with their most frequently listened to and most recently listened to songs. Those lists update dynamically as folks play their music. The features have some similarities to iLike, a social networking service that lets users share their musical tastes (BusinessWeek, 7/23/07) with friends.

For Microsoft, the expectations of Zune, version two, aren't likely to be any better than last year's model. And it's a pretty good bet that Microsoft will meet those expectations as well.

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