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How can you say that Microsoft's (Nasdaq: MSFT  ) Zune jumped the shark? It never even got to try on the waterskis.

Everyone seems to be burying the Zune after last week's dreadful quarterly report. In the company's 10-Q filing, the company revealed that year-over-year sales for its struggling portable media player fell by 54% during the quarter.

Remember, that figure runs through the end of December, before consumers were shaking their heads at Microsoft over buggy 30-gigabyte Zunes rendered useless on New Year's Day.

When you couple the Zune disappointments with Microsoft's wave of layoffs, it's easy to begin etching the headstone:

Rest in Peace, beneath this sod
I guess you were no sweet iPod
In time, perhaps, the cynics swoon
Tomorrow never came to Zune 

But maybe, just maybe, it doesn't have to end this way.

Stop the wake and wake up
I'm no Zune apologist. In fact, I was one of the early voices calling on Microsoft to euthanize the misbegotten media player. "Pick better battles, Microsoft," I urged last year, when little seemed to be going right:

  • Zune wasn't gaining on market leader Apple (Nasdaq: AAPL  ) , ranking a distant third after the iPod and SanDisk's (Nasdaq: SNDK  ) players.
  • Xbox fanboy hub GameStop (NYSE: GME  ) was discontinuing the Zune at its stores.
  • More smartphone devices like the iPhone and Research In Motion's (Nasdaq: RIMM  ) BlackBerry Bold offered portable media player functionality in a single gadget.

In other words, the Zune was made obsolete before it even had a chance to matter. However, I still think the Zune has a chance -- if it's repositioned as a gaming device today and a smartphone tomorrow.

Getting into the game
The Zune had just 4% of the media player market, and that figure's only going to get worse. Apple moved a record 22.7 million iPods this past quarter. Yes, lower prices on media players led to a 16% decline in Apple's iPod sales, but that's nowhere near Microsoft's plunge. Apple moved nearly $3.4 billion in iPod product during the holidays, while the Zune rang up roughly $0.1 billion.

Microsoft has tried to compete in music and digital video, but it can't best Apple, despite its slick and hallucinogenic Zune ads.

It's a different world in the gaming space, where the company moved 6 million Xbox 360 consoles during the quarter. Microsoft is still trailing Nintendo's (OTC BB: NTDOY.PK) Wii, but it is pulling away from Sony's (NYSE: SNE  ) underappreciated PS3 for the silver medal. What's the one thing that Nintendo and Sony have that Microsoft doesn't? A handheld gaming device. Why can't the Zune evolve -- with the appropriate interface enhancements, of course -- to compete with the DS and the PSP?

It's not just about getting back into GameStop, though that would certainly be nice. As Apple's App Store has proven to the world, there is a marketplace for third-party premium programs -- and games -- delivered directly into a portable device. Microsoft would be in its own environment there. In time, perhaps, a Zune that plays a broader range of games than it can presently may evolve into a smartphone itself.

However, that is going to take a lot of time. The point is that Microsoft can't kill the Zune now. Consumers won't trust the company if it ever does roll out a similar device in the future. It needs to make the changes -- and quickly -- to make the Zune a device worth growing. That is certainly not easy to do if it lets the public bury it six feet under.

Speaking of Zune, did you hear the Zune Phone rumor?

Microsoft is a Motley Fool Inside Value recommendation. Nintendo, GameStop, and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz doesn't own a Zune. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 26, 2009, at 10:32 PM, gregpsa wrote:

    Microsoft - who failed to capture any market share in an MP3 player, has a sinking share of the mobile phone OS market and customers who hate Vista.

    So Ballmer should take all this talent and build a mobile phone game machine - I can see it now - Xbox portable - comes with a free car battery!

    Maybe Apple should make a game machine and finish them off!

  • Report this Comment On March 11, 2009, at 10:03 PM, zeta204 wrote:

    The only reason their smartphone OS is shrinking is because more phones are being sold. Microsoft sold more phones then ever before in 2008, there were just more phones sold overall.

    The only reason people didn't like Vista was because of driver issues at launch. It's better now, get over it and stop complaining. Mac isn't any better.

    The only reason the Zune didn't sell as well is because there was no new hardware revision in 2008. There was no compelling reason to upgrade. The other reason it doesn't sell as well as the ipod is because it is only available in 2 countries. Once the Zune comes out in Europe and Asia, where Microsoft is way stronger than Apple, the Zune will have a good chance of slautering the ipod. Although a gaming Zune and a smartphone Zune would help as well, these things would allow the Zune to have a real fighting chance.

    Apple did try a gaming console, look up the Apple Pippin, needless to say it sucked balls. That's pretty much all Crapple is good at. Now, you all can go crying to freakin' Steve Jobs, and hgope it can fix everything like he's freaking Jesus or something. You Apple Fanboys need to get over yourselves.

  • Report this Comment On March 11, 2009, at 10:03 PM, zeta204 wrote:

    *and hope he can fix everything*

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