On Friday, Microsoft finally confirmed strategically-leaked rumors that it will be releasing an iPod-killer under the Zune brand later this year. I don't even know where to begin on this one.
First of all, the brand name alone is indication enough that MSFT is in above its depth. I mean, c'mon --a $245 billion market cap, and the best thing they can come up with is Zune? Sounds like the name of the comic relief alien on Bablyon 5. Didn't they do any freaking focus group tests? Seems like every time a big, established company wants to get in on some major trend they've missed, they come out with a half-baked product starting with the letter Z (marketing consultant types probably tell them the Z means they have "the last word" on the subject or some such stuff). Does anyone remember Disney's abortive effort to create an online kids portal called "Zeether"? Honestly, that was my first association.
Second, MSFT is apparently abandoning all of its established codecs and formats for the Zune. No WMA, no Janus/Plays4Sure, no URGE, no nothin'. WHAAAAAAAA????? That's like the Pittsburgh Steelers abandoning the football on their opponents' 80-yard line during the final seconds of the Superbowl. Or like Zinedine Zidane headbutting some guy right before the world cup match goes into overtime. I just don't get the strategy here; MSFT spends years and countless millions earning the goodwill of content providers, retailers, and other major music brands by creating the only functional cross-platform music formats, and then it just does an about-face, abandoning those partners with little or no warning? That's totally nuts.
Third, MSFT seems to think that imitating Apple's strategy is a good idea. This is so wrong for so many reasons. First of all, it's notoriously difficult to replicate a successful "walled garden" strategy. iPod/iTunes only works because it has pitch perfect integration of excellent (and super-sexy) hardware, software and retail. And even with Apple, the center cannot hold indefinitely; the reign of good king iPod is drawing to an end (but that's a post for another time). MSFT definitely can't compete on sexy, it has little or no retail expertise, and the chances of successful integration across the various company divisions required for this folly seem pretty close to nil. And besides all that, Apple can only get away with its ruthless monopolization (Will they ever license FairPlay to third party retailers? One can only hope...) because it's (mis)perceived as a scrappy underdog with good social intentions. MSFT, on the other hand, has been on the losing end of several antitrust suits (most recently in the EU), and is unlikely to escape the scrutiny of regulators if it continues to wall its gardens off from all the other potential cultivators of the digital music loam.
Fourth, XBOX team leader J Allard is apparently being called in to spearhead the Zune project. Cool, he certainly appears to be the one person over there who really understands (a) hardware, and (b) consumers, but wait a second -- who's going to be taking care of stuff over at XBOX while he's doing this? They're still number two, right? Seems like a bad time to turn their back on one of the few bright spots in the company portfolio. (Incidentally, XBOX is a decent brand. It's got the same late-alphabet desperation as Zune, but it's also got the what-will-they-do-next techy cachet of the iPod -- you know, a random letter placed before a nondescriptive noun.)
Fifth, what's the business model again? I thought that MSFT was only involved in hardware to the extent that it helps sell their core asset -- software. With Vista coming around the bend and the digital living room wars finally heating up, you would think MSFT would be working every ounce of mojo it's got to make sure that it controls the industry-standard DRM formats. But apparently all that's flown out the window now. So where does the money come from? Certainly not selling music, which has nonexistent margins for a la carte, and an Apple-hypnotized customer base who seem to despise subscriptions against their own best interests. Maybe they hope to get their money the same way Apple does -- by selling devices, with those nice, fat, 30 percent margins. Of course, Apple only gets those margins because they own the stores. Ok, then -- let's say MSFT sees a 15 percent margin on a product that retails for $300 (there's gotta be some price competition, right?). That's $45 per unit. How many are they going to sell? 1 million? 10 million? Even if they somehow sell 20 million devices, that delivers less that $1B in profits. That's a single-digit percentage boost for a company that made $33 billion in gross profit last year. Is that worth all the risk and mishegas?
Sixth, the Zune isn't just being billed as an iPod-competitor; it's supposed to be an iPod killer. But from the little we know of the feature set, I just don't see how this can possibly happen. It's got video -- whoop tee doo. It's got WiFi -- so does the PSP, and it hasn't killed the iPod yet. It interfaces with the XBOX -- wow, just what I need -- an MP3 player that talks to the second-place video game console. But, wait, you may say -- because of the WiFi, the Zune will allow users to trade songs with each other wirelessly. OK, that's kind of cool, but between record label restrictions and whatever DRM the thing is going to carry, it's a far cry from a portable LimeWire. So if I find someone else who also owns a Zune, who likes the same kind of music I do, they might have permission to send me a song that will probably evaporate from my player in a matter of days? It just sounds kludgey and unneccessary. Wireless will be very important for mobile music, but WiFi won't -- the real opportunity is in either WiMax or Carrier-based wireless services (can't wait to get Rhapsody or Pandora on my Treo, for which I'll gladly pay Sprint an extra $5 a month). Besides, the odds are Apple is already planning to integrate some kind of wireless into its 2007 iPods. So the feature differentiation vanishes in a puff of smoke.
All that being said, I'm hoping to finagle a free demo unit from MSFT when it finally ships. I'm a sucker for these things. Who knows, maybe I'll become a convert. Stay tuned...
Billboard is reporting that the Beatles are close to clearing their catalog for digital sale through iTunes. There's been plenty of recent chatter to suggest this was in the works (e.g. iPod-Apple and Beatles-Apple kiboshing their trademark dispute), but this time it comes straight from the cute horse's mouth -- Sir Paul, himself. 
