Zune Dies, iPod Lives

Bid farewell to the Microsoft (Nasdaq: MSFT  ) Zune. Long live the Apple (Nasdaq: AAPL  ) iPod classic!

A few weeks ago, Microsoft had updated a Zune support page that indicated that the Zune was being discontinued to focus efforts on Windows Phone 7 as the center of the company's mobile music and video strategy. Shortly after this website was discovered, Mr. Softy backtracked and said the site was put up by mistake. Now, Microsoft has yet again changed its mind and confirmed once more that Zune hardware is no longer in the making.

Meanwhile, speculation has lingered that Apple would kill off the stagnant iPod classic line in favor of iOS devices like the iPod touch and iPod nano. The current generation of the iPod classic was introduced more than three years ago, in September 2008. It's the only iPod that currently doesn't use flash storage, still relying on an old-fashioned spinning disk hard drive.

The notion of killing off the iPod makes some sense. The iPod segment overall is the only one within Apple that has been showing revenue declines as the Mac, iPhone, and iPad lines continue to steamroll forward at breakneck growth rates.

Instead of looking at reasons to kill the model, let's look at reasons to keep the model. Although last quarter's overall iPod experienced a 20% drop in unit sales, the division still brought in $1.3 billion in revenue, which is the size of some small companies alone. In addition, the iPod classic targets a different audience: music hoarders who value capacity and aren't interested in touchscreen games.

Unlike Hewlett-Packard (NYSE: HPQ  ) , Apple doesn't like to get rid of divisions that are still profitable. With the hardware admittedly dated, it's tough to imagine that Apple spends much to maintain the segment; meanwhile, component costs are dropping faster than retail prices.

A study by market researcher NPD Group released in February listed the top 10 MP3 players by unit sales in 2010. Apple literally claimed the top nine spots with different iPod models, and the classic landed in fifth place. The model is continuing to sell well even without having seen any upgrades for years.

In stark contrast, the Zune has never done well. Back in 2009, Microsoft disclosed that its Zune revenue had fallen by $100 million, a 54% decline. In the discussion of the Entertainment and Devices Division, or EDD, the 2010 10-K annual report adds, "Non-gaming revenue decreased $197 million or 25% primarily reflecting decreased Zune and Windows Phone revenue."

I'm bullish on Windows Phone 7 and Windows 8. Ditching the Zune and focusing on those platforms is the right thing to do. In the meantime, the iconic iPod classic is still holding its own in sales, so why kill it?

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Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft and Apple, as well as creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (1)

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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 October 11, 2011, at 9:43 PM, AngelTread wrote:

    The death of Zune is just one more disaster in Microsofts long list of failed portable and mobile devices.

    People need to start asking questions about why every single mobile device Microsoft releases fails. How many failures does Microsoft need to display before people wake up to this disaster?

    Windows Mobile is written off. Kin phones, costing a billion in development, failed to sell. Now Zune has also failed.

    While Zune isn't a mobile phone, it could have been if Microsoft was smart enough to use the same operating system for both, like Apple does with iOS in music players, phones and tablets. ZuneHD was isolated. It didn't link with anything else.

    The next train wreck is Windows Phone. Nothing to get bullish about here. Windows Phone is sub 2% of the smartphone market (competitor, Android is 40%+). It's 'Mango' update has taken a year, and is purely playing catch up to competitors.

    There are only 2 ways to break into the mobile market. Either your interface is so radically different to what came before, ushering in a totally new paradigm of computing (eg iPhone)... or, you bring out a platform that is both completely open (both open-source software and open services, and backed with money).

    In both music players and phones, Microsoft made the mistake of trying to emulate Apple with closed and proprietary systems. Apple had first-mover advantage. Microsoft is a late-comer and doomed with 100% certainty of failure. Microsoft needs new leadership and a new approach.

  • Report this Comment On October 12, 2011, at 2:54 AM, bluerobertq wrote:

    "Although last quarter's overall iPod experienced a 20% drop in unit sales, the division still brought in $1.3 billion in revenue"

    "Unlike Hewlett-Packard (NYSE: HPQ ) , Apple doesn't like to get rid of divisions that are still profitable."

    this are somethings that HP guys should read. why should i get rid of a still profitable and even number one in sales division?

    HP should keep the webOS unit, now that they are number two Brand (not OS) in selling tablets. HP should take the touchpad and pre3 to other countries and offer competitive prices, and get money from the sales of the apps and services, like the playstations of xbox.

    developers like me, even with apps sales 10 times higher than ever, cannot afford to continue in a dead platform, and i should say, many developers get interested in the platform, because of HP. i am following the brand, but i don't know for how much if they don't make a final descition.

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