Microsoft awakens to Apple threat

Giant jostled by iPod's dominance launches Zune today

Allison Linn, Associated Press

Tuesday, November 14, 2006

SEATTLE - Few have accused Microsoft of being first to the market. But plenty have learned the hard way that the company can be very good at sneaking up from behind.

That's the tack Microsoft Corp. is hoping to take with entertainment. The software maker has invested years of effort and billions of dollars in entertainment endeavors, including television technology and video game consoles. What's more, it has said that it's willing to spend much more money, and take much more time, to see if those investments pay off.

Its latest effort, the $249.99 Zune portable player and music service, debuts today and marks one of the most high-profile attempts to take on Apple Computer's iPod and iTunes powerhouse.

Analysts don't expect the early effort to make a serious dent in Apple's market share.

"It's not even going to give the

iPod a bad headache for the time being," said analyst Michael Gartenberg of Jupiter Research.

Still, Gartenberg says Microsoft's competitors may have reason to be wary of what the company's deep pockets and dogged persistence could accomplish in years to come.

For Redmond, Wash.-based Microsoft, which rakes in billions from its highly profitable Office business software and Windows operating system franchises, it may seem strange to put so much emphasis on digital entertainment businesses, where profitability can be much trickier.

But analyst Toan Tran of Morningstar says the company could have little choice but to get into those businesses. That's because entertainment devices, which are now used for such varied tasks as storing photos, playing video games and watching movies, are increasingly encroaching into the turf Microsoft has tried to hold onto with the Windows operating system that powers most personal computers today.

"Microsoft wants to get into the space because it's a very big market, and the PC is not the center of the world anymore," Tran said.

Microsoft says it has grown interested in entertainment because technology now plays a bigger role in the way people do everything - including watching television and listening to music. Robbie Bach, president of Microsoft's entertainment and devices division, said that's a change that plays to Microsoft's strengths.

Still, Microsoft has yet to figure out how to make a lot of money at this new game.

While it has earned a following with the Xbox console and its online game play service, Xbox Live, the effort is still losing money. It could also take four years or more before the Zune effort is profitable. Overall, Microsoft's entertainment and devices division lost $96 million in the quarter ended Sept. 30.

The Zune launch also follows on the heels of another Microsoft- backed digital music effort, called PlaysForSure.

In an interview Monday, Chief Executive Officer Steve Ballmer said Microsoft will continue to support the companies that make PlaysForSure devices and services. But he said the company decided to also launch its own Zune product, which isn't compatible with PlaysForSure, after seeing that that effort wasn't doing much to temper Apple's momentum.

"We said, if we just keep on our current model, it's unclear that we're going to expand our footprint in these portable devices," Ballmer said.

Microsoft also is hoping to differentiate itself from Apple with Zune's built-in wireless connection, which allows users to share songs with other nearby Zune users.

Gartenberg, the Jupiter analyst, said cash-rich Microsoft can afford to be persistent and try new ideas in taking on market leaders such as Apple or Sony. It's a luxury available to few other companies, he said.

"They've learned that they can buy market share," he said.

Zune at a glance

• Cost: $249.99

• Features: Holds 30 gigabytes of music, videos and photos

3-inch screen

Can exchange songs with other Zunes wirelessly

Built-in FM radio

Four-way navigation

2 million songs from Zune store

• Colors: black, white and brown

• Drawbacks: Can't transfer anything you bought from iTunes, including the ever-growing selection of TV shows and movies available at the Apple Computer site. But Zune has its own twisted code of honor. It won't even play songs bought through Microsoft's own partners, such as Napster or MTV's Urge. However, it will import MP3s and unprotected files.

To buy music, you must purchase blocks of "points" from Microsoft in increments of at least $5.