Microsoft set to bow 'iPod killer'

As Microsoft gears up to take on Apple Computer’s wildly successful iPod and its iTunes Music Store — 1 billion songs sold and climbing — company chairman Bill Gates may succeed where so many others have failed. Then again, he may not.

Set for unveiling sometime later this year, Microsoft’s Zune device, which some at the company have optimistically dubbed the “iPod killer,” could be up against a firmly entrenched perception in the marketplace that Apple’s MP3 product line is the way to go.

And in marketing, perception is everything.

“Apple wasn’t the first to do a musicstore online — they were the first to do it right,” says Michael Gartenberg, an analyst at Jupiter Research, which specializes in personal technology. “You could legally buy one-off songs — you didn’t have to buy the whole album — and you could take them on the road. The iPod-iTunes combination was the first and arguably the best option for consumers who wanted digital music online legally.”

Such an option, he says, was particularly welcome in the wake of the unpleasantness over Napster and other file-sharing Web sites that took the purloining of songs to unprecedented heights before being brought to heel.

Apple’s attention to detail, Gartenberg says, “really helped to differentiate (it) in the marketplace,” and the unprecedented demand for the iPod wares solidified Apple’s resurgence after several years of drought.

About 50 million iPods have been sold, a number that shows there was “a lot of pent-up demand from consumers who would do the right thing and not steal music,” Gartenberg says. Since its launch in 2003, iTunes has captured a market share of more than 70% of U.S. digital music sales.

“Apple has really come to own the digital music space, much to Redmond’s chagrin,” he adds, referring to the location of Microsoft’s headquarters in Washington state.

Other pretenders to the MP3 throne — such as Yahoo Music, Rhapsody and iRiver — “have done a lousy job of competing with Apple and taking any significant market share,” Gartenberg says. “Microsoft is really going to have to come up with a very compelling solution if they’re going to win the hearts and minds of dedicated iPod users.”

Naysayers aside, there seems to be plenty of excitement in the blogosphere for Microsoft’s new digital media player, with various adherents claiming in recent days to have seen prototypes (an unofficial “photo” or mockup appears on some Web sites) and speculating about its likely features. The Zune is expected to be ready for the year-end holiday season.

Jenny Toomey, executive director of the Future of Music Coalition, a research and advocacy organization for the industry, says that Apple is “tremendously vulnerable” because its licensing deals with record labels are not exclusive. The labels could easily get a better deal with Microsoft, which would change the equation in a hurry.

Still, Toomey tips her hat to Apple for demonstrating there could be a legitimate digital music marketplace.

“Once you had the majors agreeing to license their music all in one place, that became the marketplace.” The independent labels followed, she says, in a series of deals that were more equitable and transparent than had previously been seen in the normally secretive industry. All that, Toomey says, came about because of iTunes.

Mary Madden, a senior research specialist at the Pew Internet Project, which studies online usage, notes when iTunes announced in February the sale of its 1 billionth song, the service “exceeded all expectations.”

A recent Pew survey found that 27% of adults are using paid music downloading services, with iTunes leading the way.

“They were one of the first major test cases for the digital music market,” Madden says, “and many other digital content providers have followed suit.”

Most are far behind Apple, which announced revenue of $4.37 billion in its last quarterly statement and reported having sold 8 million iPods in the last three months.

But the raging success of iPods and iTunes also means the music biz is being forced to accept Apple’s entrenched pricing structure instead of tiered pricing that would be dependent on, say, the age of the song. As a result, there has been some tension between Apple and the labels.

Microsoft may capitalize on that tension when it releases Zune, says digital audio industry analyst Susan Kevorkian of Intl. Data Corp. in San Mateo, Calif., including the possibility of tiered pricing for its musical offerings.

“It would not be surprising to see Microsoft do things a little differently,” she says. “The music industry would prefer to retain as much power as possible in the equation, and Apple’s dominance in the online music market could be seen as undermining that influence.”

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