Leaving So Zune?

Microsoft (Nasdaq: MSFT  ) was bold enough to walk out on Microhoo. Will it be brave enough to bail on its Zune, as well?

No, Mr. Softy isn't ready to throw in the towel on its portable media player just yet. The company has recently started selling television show episodes and broadened the social-sharing functionality of the devices. The problem is that the writing is on the wall, even if Microsoft is pressed up against it too closely to make out the lettering.

Market research NPD Group pegs Zune's market share in this space during the first quarter at a measly 4%. Apple's (Nasdaq: AAPL  ) iPod is the giant, of course, with 71% of the market. However, all of Microsoft's might hasn't even been enough to knock off silver medalist SanDisk (Nasdaq: SNDK  ) and its 11% slice.

Video killed the portable star
This month's new initiatives are unlikely to change that. Yes, teaming up with companies like Viacom (NYSE: VIA  ) and General Electric (NYSE: GE  ) to digitally deliver shows like South Park and Heroes to users at $1.99 a pop is a logical step for Microsoft. The company has been beaming video into Xbox 360 hard drives for awhile. The problem is that Apple has been serving up video for a couple of years now. Just copying the leader isn't enough.

The sharing element is less of a needle-mover. The original Zune's distinction was that it would allow a Zune owner to temporarily share a tune with a fellow Zune owner. The song would disappear after a few plays, unless purchased. It was a clever approach on paper, but a joke in application. Why? Well, a viral feature can't work if you don't have a vibrant community to spread the virus. Zune is at 4% market share! What are the chances of bumping into a fellow Zune user?

The update solves the knock that Zune owners would get for sharing self-detonating tunes. Now fellow users can transfer the most recent tunes that they have streamed to another user permanently. Nice? Not so nice. The recipient needs to be part of the $14.99-a-month Zune Pass service that provides unlimited streaming. In other words, it's not all that different than the Napster (Nasdaq: NAPS  ) and RealNetworks (Nasdaq: RNWK  ) Rhapsody unlimited subscription services that SanDisk owners have had access to for years. Yes, the permanent transfers are a nice touch, but now you are further slicing that 4% of the Zune market to those willing to pay $15 a month -- more than a satellite-radio subscription -- for that functionality.

Building a better mousetrap, but with fewer mice
I guess now would be a bad time to point out how iPod year-over-year sales growth pretty much stalled this past quarter at Apple. This isn't opportunity knocking for Microsoft to take the lead. It's a maturing market that peaked without it.

So what's Microsoft trying to prove? I'll give it props for coming up with creative television marketing campaigns and attempting to think outside the box. The problem is that everyone else is perfectly content inside the box, iPod earbuds and all.

Walk away from the Zune, Microsoft. There are only two scenarios in which I can see this as a battle worth fighting: one, if this is the platform that will be used to take on your video-game console rivals in the portable handheld market; or two, if it will bring something new to the wireless communications space. If the Zune is going to evolve into the next DS or PSP, blessed with a ton more storage capacity, great. If this is going to be a cell phone, in a brazen attempt to take on the iPhone, at least you have a strong enough mobile-operating-system pedigree to have a shot.

Anything else and you're just fighting a losing battle. The Zune will never be an iPod killer. Truth be told, it will never even get close enough to be an iPod tickler.

More ticklish Foolishness:

Microsoft is an Inside Value recommendation. Apple is a Stock Advisor selection. You don't need to work your way alphabetically through to the Zune to see some great stock picks. A 30-day trial subscription to see which newsletter is right for you is available.

Longtime Fool contributor Rick Munarriz is proud to say that he never bought one of those brown Zunes. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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