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9/28/2006
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Zune Pricing Shows Microsoft Waging Market Share Gamble

Microsoft releases pricing for Zune, the Apple iPod challenger that some analysts believe the software maker is selling at a loss to grab market share.

Microsoft on Thursday released pricing for Zune, the Apple iPod challenger that some analysts believe the software maker is selling at a loss to grab market share.

The portable media player is scheduled to ship Nov. 14 at a retail price of $250. The release date is 10 days before the official start of the holiday shopping season, which is the day after Thanksgiving.

The new 30GB player that sports a 3-inch video screen will be supported by a variety of accessories, including kits for playing the device in the car and home. The latter includes a remote control. Accessories will range in price from $20 to $100.

In launching the Zune, Microsoft is going head to head with Apple, which has captured more than three quarters of the market, according to the NPD Group. The price of the Zune is a dollar more than the comparable iPod, but the Microsoft device has additional features, such as an FM tuner, and the ability to transfer songs between Zune devices wirelessly. In addition, Zune ships preloaded with songs and video from popular artists such as Band of Horses, Bitter:Sweet, Coldcut and others.

Apple and Microsoft, which is also launching a Zune music store the same day as the device, are selling songs for 99 cents apiece, an indication that record labels would prefer to avoid a price war. Microsoft is also offering a subscription service for $14.99 a month. Apple has so far refused to offer such a service on its iTunes store.

In offering a beefier overall package for nearly the same price, Microsoft has apparently decided to sell the Zune at a loss. Michael Gartenberg, analyst for JupiterResearch, said in his blog that it's unlikely Microsoft is getting the volume discounts on components that Apple gets, and the software maker is probably paying more to make the device, given the larger screen, and Wi-Fi wireless capabilities.

"The key, I suspect, was not being undercut by Apple, and if they need to lose money on Zune to build market share, they will, much as they have done with XBox," Gartenberg said.

Microsoft sold the XBox videogame console for years for less than it cost to make, according to experts, in order to grab market share from leader Sony, which sells the PlayStation.

Microsoft entering the digital player market has caused major shifts. Onetime hardware partners such as SanDisk, Creative Labs, Samsung and others using Microsoft's Windows Media Player software have become competitors overnight. As a result, alliances have started to form, JupiterResearch analyst Joe Wilcox said.

The leading camp, of course, is Apple with its own hardware, software, copyright-protection technology and online store. The other two are Microsoft and Toshiba, which manufactures the Zune; and RealNetworks and Sandisk. RealNetworks offers its own Rhapsody music store, multimedia software platform and copyright protection technology.

"Before, it was Apple and everybody else, with most of them in the Microsoft camp," Wilcox said in his blog. "The Microsoft camp just got a lot smaller, and more rival groups are sure to follow the lead of Real and Sandisk."

Going forward, it remains to be seen whether the competing camps and technologies will confuse consumers, and make them skittish about buying online music and video.

Microsoft's entry in the market followed several years of working with hardware partners that failed to stop the iPod's ascent in a growing multi-billion-dollar market. Now that the Redmond, Wash., company is going it alone, competition is sure to heat up.

"This is just the beginning," Chris Stephenson, general manager of global marketing for Zune, said in a statement.

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