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9/14/2006
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Analysts' Take On Zune: Give It Some Time

One thing is for sure: Microsoft is looking for new growth engines in consumer electronics, and Zune is a big part of that push. Still, catching up to Apple won't be easy.

Details surrounding Microsoft Corp.'s Zune set off a positive buzz among analysts Thursday after the software maker released information on its upcoming portable media player and online store.

The information came out a day after Apple Computer Inc. released major upgrades of its competing product line, and iTV strategy aimed at helping consumers to get the content from the computer to TV.

Behind the strategy, Microsoft's looking for new growth engines in consumer electronics, analysts said. Although the Xbox 360 game console proved an expensive endeavor, the Redmond, Wash., company continues to look for next big trick.

Senior vice president and chief equity strategist Robert Toomey at Seattle-based E. K. Riley Advisors calls the announcement another step in a broad strategy for Microsoft to build out its entertainment division.

Toomey also believes Microsoft has an uphill battle against Apple in consumer market, but success will come if they can position "Zune as one of many software-driven products in Microsoft's overarching strategy to expand in the home entertainment and consumer market," he said. "As more computing moves to the Internet and small digital devices, Microsoft needs to be there to drive growth in the profitable software business."

Credit Suisse analyst Jason Maynard said it could take time for Microsoft to catch up to Apple's three-year lead, but interesting Zune features that caught his eye are the FM tuner and Wi-Fi capabilities.

"The guys who created Zune at Microsoft are probably some of the most talented and smart-minded," he said, explaining that J. Allard took the lead in designing Zune. "They didn't announce a connection with gaming, but you can bet the guys that brought you Xbox and now Zune have something up their sleeve."

Analysts don't expect profits to come from the hardware, but rather software and on-going services that tie the media player into Microsoft's home media center through Vista. "I don't think the hardware will become an attractive business," said Walter Pritchard, senior analyst, Institutional Research, Cowen and Company LLC. "The sale of download music hasn't really done much for Apple's iPod business."

And as devices converge into one multimedia platform, some speculate Zune could become the first step toward a cellular phone-like device that would encompass all features. It wouldn't surprise Pritchard to see Microsoft merge Windows mobile and Zune, but he said it's easier to convince people to use their phone as another device, rather then using their music device as a phone.

Microsoft could eventually build a development community around the Zune brand that would allow software developers to create downloadable apps, agrees Mark Murphy, managing director at equity research firm First Albany. "There are technical details that aren't known yet about the exact specifications on the hardware," he said. "It looks like more of a software approach, which leaves many options open."

Murphy said look at Microsoft's approach to Xbox 360 that allows gamers to connect and share information, and it becomes apparent to the approach they will take with Zune.

Analysts were fairly positive on the media player's success. But ask Murphy his thoughts on the branded name and you'll likely get another reaction. "I don't think the name is the zippiest thing out there," he said. "The Zune only has one syllable. Most of the names have two: X-box, Walk-man, but I guess it will work."

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