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Kill the Zune, Microsoft

If you're one of the roughly 2 million buyers of Microsoft's (Nasdaq: MSFT  ) gutsy portable media player over the past two years, you won't like me today. I'm suggesting a mercy killing for the Zune -- but please, hear me out.

I have nothing against the device. The original model brought something new to the table with its social sharing. Last year's upgrade offered head-nodding improvements. However, now that even GameStop (NYSE: GME  ) is getting out of the Zune-selling business, isn't it just a matter of time before the player itself becomes a museum piece?

GameStop may not seem like an apt yardstick for the Zune's fortunes, but consider this:

  • GameStop sells a ton of Xbox 360 systems and games, so it's a hotbed of Microsoft fans.
  • The chain proudly sells used games and gear. If a company would rather stock dusty copies of Madden '06 than a Zune, what does that tell you?
  • The company noted during yesterday's conference call that gross margins on the hardware side slid this past quarter, based on the move to discontinue Zunes. If Zunes are doing so poorly that GameStop would rather be moving hardware with lower margins, they must have really been collecting dust.
  • With stand-alone CD shops disappearing, GameStop is a good retail gauge of the pulse of music-loving youth.

Don't be a player hater
No one expected the Zune to be an iPod killer, but it's not even nipping at Apple's (Nasdaq: AAPL  ) ankles. Heck, it's not even up to SanDisk's (Nasdaq: SNDK  ) belly button.

Q1 2008

Market Share

Apple iPod








Source: NPD Group

Is Apple vulnerable? Critics can point out that Apple commanded a whopping 76% of the market two years ago. However, what about the brisk-selling Apple iPhones, which also double as iPods? Apple is looking to move five times as many of its pricey iPhones this year than all the Zunes Microsoft has sold to date. Even Research In Motion's (Nasdaq: RIMM  ) new BlackBerry Bold smartphone syncs up to Apple's iTunes, further entrenching Apple as the digital-delivery standard.  

There's little reason to get excited about the Zune, especially since the second million units have sold slower than the first million, despite their generational enhancements and Microsoft's costly marketing campaigns.

Attack of the iPod people
I get why Microsoft wants to bury the iPod. The player's success created a halo effect, winning over Mac converts. They're using Mac's operating system over Windows, surfing on Safari instead of Explorer, and not necessarily relying on Microsoft Office, even though it's popular and available for the Mac.

If successful, the Zune could have given Microsoft its own halo effect, just as the Xbox gave Mr. Softy the Halo effect.

Unfortunately, there comes a point when persistence becomes embarrassment. No one laughs at SanDisk or Creative for taking up slings and stones against the Apple Goliath, but Microsoft is too big to settle for being a niche player. The whole social sharing distinction of the Zune becomes a joke when there are too few Zune owners around to share tunes with.

Apple sold 10.6 million iPods -- and another 1.7 million iPhones -- this past quarter. In other words, it would take Apple less than three weeks to sell the number of portable media players that Microsoft has sold since Zune's birth.

Pick better battles, Microsoft. Even transforming the Zune into a cell phone or portable video game player may not be enough, though at least it would get customers talking again.

More importantly, when you've worn out your welcome with small-box GameStop shops and their audience of Xbox fanboys, it's probably time for a change of Zunery.

Further Zuned-out Foolishness:

Microsoft is an Inside Value recommendation. Apple and GameStop are Stock Advisor selections. Discover all their great stock picks when you try any of our newsletters free for 30 days.

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 the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy is music to your ears.

Read/Post Comments (5) | Recommend This Article (12)

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 May 23, 2008, at 3:43 PM, dileepkrp wrote:

    Just shows how short sighted the author is. I am pretty sure this is what you might have suggested for the XBox against PS3. Wait till MS comes out with v3 of Zune. Success takes patience, even if writing articles about it may not.

  • Report this Comment On May 23, 2008, at 5:57 PM, BitCrazed wrote:

    It astonishes me too that the author is THIS foolish.

    The Zune has been in existence for 18 months now and entered a market dominated by Apple and by a series of smaller vendors. In that time, it's grown a sizeable audience of fans of music, as opposed to sheep of style.

    The one thing that this and many other commentators fail to recognize is Zune's ability to play ripped CD's and/or MP3's, as well as offering a subscription service which, for the price of one CD per month, enables the listener to enjoy an enormous and growing library of tracks.

    Now combine this with Zune marketplace's recent addition of video and TV content and its ability to synch text and video podcasts and the Zune starts looking REALLY REALLY attractive.

    And as the previous commentator pointed out - this is only v2. Rest assured that the team are beavering away on more goodness as I type.

    The world deserves better than iPod and iTunes. Zune is it.

  • Report this Comment On May 23, 2008, at 9:21 PM, MacZen wrote:

    Microsoft with yet another "me-too" product was way late to the party. Zune was and still is DOA. Nothing that the two previous postings mention does anything to change that. There simply is not enough differentiation between it and the others, especially the iPod. The XBox still loses gobs of money. Zune is not it and never will be.

  • Report this Comment On May 24, 2008, at 2:00 PM, jcwestbrook wrote:

    GameSpot is not a store people go to for music or MP3 players. GameSpot did not promote Zunes past the Halo tie in. It's no big loss for Microsoft. There isn't a connection between the Zune and the XBox 360 - yet. As of right now there is no prevailing reason to buy them both. If Microsoft linked XBox Marketplace and the Zune Marketplace - and allowed you to play purchased content on either your TV or Zune - that would be a compelling reason to buy both.

    People aren't even that brand loyal with Apple! Think of what kind of market share Apple would have in the PC market if every iPod owner also bought a Mac.

  • Report this Comment On September 10, 2008, at 9:07 PM, heine19 wrote:

    I don't even know what a Zune looks like.

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