For the last week, the rumor of Zune, reportedly some kind of Microsoft-branded iPod, dominated tech news, community, and blog sites. The general media was obsessed, too, as the Zune story offered so many enticing angles, such as Microsoft battling its arch-rival Apple, the company now defining the digital music experience; Microsoft back-stabbing its digital music partners by embracing a vertical digital music strategy; and Microsoft jumping deeper into the consumer electronics space despite huge financial losses on products like Xbox 360.

Despite all the speculation, there were few facts and no official word from Microsoft. But finally, proof of the existence of Zune came from a pre-release Billboard article quoting a Microsoft executive.

 

What is Zune? 

While even today the Microsoft Web site does not mention Zune, an article at Billboard's Web site reported on an interview with Microsoft GM of marketing for MSN Entertainment Business, Chris Stephenson. In that article, Chris gave some hints as to what Zune is and is not: 1) it is an umbrella brand for a family of hardware and software offerings; 2) a Zune music player will be the first device, and it will include a hard drive and WiFi capability; 3) the wireless access is the heart of the device, as it will enable users to share playlist and link to other devices; and 4) that the Zune service is not an enhanced MSN Music offering.

 

Without detailed information, first-generation Zune player capabilities remain a mystery

Short on specifics, the article leaves plenty of room for continued speculation. Top Zune-related rumors that have not be verified or discredited include that:

• Devices may be more multi-function than an iPod. While it is obvious that a first-generation Zune device will play music, will it play videos? The Stephenson interview hinted at follow-up video devices, but it is hard to believe that the first device would not match the capabilities of the full-size iPods. Since the high-end iPods offer rudimentary games, address book, and data storage capability, it would make sense for Zune, version 1, to do the same, and perhaps add more.
  
  Additional capabilities could be the ability to play more intensive games and the inclusion of more advanced PDA- (personal digital assistant) like functionality. Of course, these last two items would require a more robust input mechanism, including game controller inputs as well as stylus support. 
  
  
• Devices may support a variety of wireless activities. The interview hinted that wireless interactivity will be a key differentiator of the device, but will a Zune player only offer to share playlists? Other possibilities, which would again require more robust input than an iPod, include the ability to text message and share images or videos.
  
  These extra features would require robust device security so that unauthorized people can't tap into a Zune user's personal content and easy to use applications so that users can accomplish these social activities with minimal tech knowledge and fuss.
  
  
• Devices and services may be incompatible with PlaysForSure devices and services.  Seemingly going against all that Microsoft has promoted over the last few years, there is speculation that Zune products will work with other WMA (WIndows Media Audio) stores like Napster and Yahoo! Music, but that other non-Zune devices and stores will not be upwardly-compatible with Zune. That is, the Zune experience will require specialized Zune PC software, devices, and online services.
  
  
• First-generation devices may offer less storage for the same money as a top-of-the-line iPod. A persistent rumor is that the first Zune device, emerging sometime this fall or winter, will cost $399 for a 30GB version. However, this seems unbelievable, given that Apple already sells video-capable iPods for $299/30Gb and $399/60GB. If this is true, Microsoft will have to convince consumers that unique features, such as the wireless capability, are worth paying more for less in terms of digital content storage.
  
  
• The purchase of a Zune device may include an offer for users to get free re-downloads of their ITMS tracks. Another common rumor is that Microsoft will try and pry users from the Apple ecosystem by offering free digital downloads in Zune format of any tunes consumers have purchased in Apple's online music store, the ITMS (iTunes Music Store). Certainly it would not be hard to scan the iTunes software database and identify the purchased tracks, but this strategy seems to be both expensive, an admittance of severe competitive weakness, and largely irrelevant. Despite the billion-plus tunes sold on ITMS, most iPods are filled with music ripped from CDs.

 

Zune is all about Microsoft's obsession with consumers, not about near-term profits

Microsoft has several successful products in the consumer space. Windows, of course, is the dominant consumer operating system. The company also sells a line of branded accessories, such as mice and keyboards, and it develops and markets games for Windows PCs and its Xbox game consoles. But despite its efforts and billions of dollars invested, Microsoft's has failed to profit in the consumer space. For example, it continues to battle Sony in the game console space, but has yet to turn earn money off its Xbox offerings. Its MSN Internet access and content division have always struggled to dethrone America Online and other rivals, and now it is soundly behind Google and Yahoo! in Internet search. It is true that its Hotmail free email and MSN Messenger offerings are successful in terms of the millions of users, but taken as a whole, the consumer market has been a financial black hole.

How bad is it in a financial sense? Microsoft's latest earnings report continues to paint a bleak consumer market picture. Looking at its business segments by revenue and profitability, it is obvious the company's consumer forays -- outside of Windows -- have not paid off yet.

 

Will the Zune family be profitable, or another drain? 

Can Microsoft make money in the digital music market? Apple's digital music success has fueled the company's profits. Where once the company relied on its Macintosh PC line to deliver income, now its iPod ecosystem is a cash cow. In its most recent quarterly earnings, Apple reported a profit of $472 million and said it had shipped 8.1 million iPods.

It is obvious the iPod/iTunes/ITMS family has been extremely lucrative for Apple. Obviously, there is a proven roadmap for profitability with digital music offerings. Whether Microsoft is once again willing to lose money over many years to gain a foothold in the market remains to be seen. But the issues Microsoft faces in order to be successful are not trivial, including:

• Overcoming the iPod brand dominance. While the appeal of brand names are subjective, to New Rowley, Zune is a very weak brand name. It sounds as if it is an offering from Mattel or Nickelodeon, not the name of a hip new line of personal digital products and a digital music experience.
  
  
• Competing feature- and style-wise with Apple. Windows and the Mac OS have competed in the public spotlight for some time, and the Apple operating system -- and its hardware -- is usually seen as more user friendly and appealing. With the functionality of devices, software, and services requiring similar interfaces, Microsoft will continually be compared to Apple -- from the ease of syncing the device to the PC software to the various interfaces in the music ecosystem. In the console space, Microsoft has so far out delivered Sony in terms of interfaces, particularly its online services, but beating Apple on features and style will be much harder.
  
  
• Nursing its second-class WMA music citizen partnerships. Previous digital music partners -- the  device makers and music retailers -- are seemingly left out of the Zune world. Even MTV's URGE offering seems like a Redmond orphan. If the generic Windows Media Player, online WMA store like Napster, and devices from vendors like Creative are to remain viable, then Microsoft will need to support a two-track digital music strategy that will defocus its efforts to battle with Apple.
  

 

iPod killer, earnings eroder, or both?

We will have to wait until after the 2006 holiday season to gauge the initial impact of the Zune ecosystem. But assuming Apple won't sit still, Zune will face an uphill battle to even survive beyond 2007. And when Apple finally decides to license the ITMS infrastructure to other retailers as New Rowley believes they eventually will, even Zune won't keep Microsoft from once again slipping to the bottom of that hill.