Can Microsoft’s Zune player take a bite out of Apple?

Ever since Apple revolutionised the world’s music industry with the iPod, rivals have been scrambling to get a foothold in the lucrative portable MP3 player market. This week, the world’s biggest software manufacturer Microsoft launches its Zune device and associated music download service in the US, in what could be the biggest threat yet to Apple’s dominance of the sector.

Most industry commentators agree that the move is unlikely to present an immediate threat to Apple. However, with the marketing clout of Microsoft behind the new venture, it could pose a serious challenge to the market leader in the longer term.

Initially, Microsoft is launching only one model – a 30GB digital media player with a 3-inch LCD colour video screen and a built in FM radio that will sell for $249.99 (£130). Microsoft hopes the key distinction will be the device’s wireless technology, which allows for “Zune-to-Zune” sharing of music, pictures and home recordings.

But Dan Cryan, analyst at media research firm Screen Digest, points out that it is not compatible with other services. “Without reasonable penetration and uptake that feature is not terribly attractive,” he says.

Corporate Edge head of branding Richard Buchanan argues that Microsoft has failed to create a “strong enough proposition” to encourage consumers to switch. While Microsoft claims Zune offers “enhanced connectivity”, the difference is only “marginal”, according to Buchanan, who adds: “Apple is a sexy, alluring brand and far more aspirational than Microsoft.”

In a move that some believe could change the entire music download landscape, Microsoft has agreed a groundbreaking licensing deal with Universal Music to hand back a small portion – estimated to be just over $1 per device – of the money it receives from every Zune. This is a definitive shift away from Apple’s flat-rate pricing model.

Microsoft is also in discussions with other major music providers as it moves to address longstanding concerns about technology companies pocketing all the profits from digital music sales. However, with Apple’s share of the MP3 market in the US exceeding 70%, it occupies a powerful negotiating position. “Apple’s share of the market is so large that it is not under any immediate pressure to change its retail pricing policy,” Cryan adds.

As the battle heats up in the US, the online music industry continues to experience enormous growth in Europe with the total market expected to double from $121m (£63m) in 2005 to $280m (£147m) by the end of this year, according to a recent report by Screen Digest. Despite the opportunities this presents, it is likely to be over a year before Microsoft taps into this market after delaying the worldwide roll-out of Zune.

While the company is remaining tight-lipped about the reasons behind the decision, it is understood to be the result of its failure to identify a music store partner in the UK and Europe. The staggered launch will allow Microsoft to gauge consumer interest in the product.

But Cryan says that with Sony’s PlayStation 3 not available in Europe until next year, Microsoft is missing an opportunity to capitalise on gaps in the consumer electronics market over the critical Christmas period.

Last year, Dell tried to take on Apple with the launch of its own portable music device, DJ Ditty, in the US. But it was forced to delist the device earlier this year after failing to grab market share. Microsoft is unlikely to suffer a similar fate but the worldwide roll-out of Zune will prove critical to the product’s longevity.

Noelle Waugh