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Microsoft's New Paperweight

http://www.fool.com/investing/value/2007/01/10/microsofts-new-paperweight.aspx

Seth Jayson
January 10, 2007

Insert Zune joke here
When I purchased a (brown!) Microsoft (Nasdaq: MSFT  ) Zune about a month ago, I figured I was getting a couple of things. For one, a pretty decent media player, with a few key features iPod lacked: a prettier user interface, a subscription music model, and a bigger screen.

For another thing, I assumed I was getting a potential collectors' item -- something along the lines of an Edsel.

But I didn't realize just how quickly the Zune would be made into a paperweight. It only took about a month, as it turns out. Steve Jobs did it yesterday, with his unveiling of the latest Apple (Nasdaq: AAPL  ) iPod.

Phone-y iPod
He didn't unveil an iPod yesterday, you say? I beg to differ.

Sure, the product he showed off was a phone, something so expensive and so limited in capacity that it won't -- can't -- have the same traction as the iPod. But it's pretty clear what the next generation of iPods can (and likely will) be.

Apple simply needs to tear out the pricey phone guts, thicken the form factor to accommodate the greater storage capacity of miniature hard drives, and bam, the Zune has no advantages left. The iPod's screen will be bigger, its user interface will be prettier, and if Apple leaves that Wi-Fi chip inside, it can easily enable player-to-player file-sharing and hotspot downloads, killing the Zune's alleged "social" advantage. This also makes an instant relic out of SanDisk's (Nasdaq: SNDK  ) latest Wi-Fi enabled Sansa Connect model.

Welcome back to the social
Yes, everyone has scoffed at the limited-share model, but if you've tried it, it's actually pretty cool. Sending friends -- or that cute commuter across the train aisle -- a song they can listen to three times, and later buy with a single click, is a lot niftier than handing someone a gooey, earwax-covered headphone, as Jobs has reportedly recommended.

And it's a great way to get people buying more music. I think Steve is going to come around to a social model, despite his original scoffing. (Remember, Stevie once said there was no reason to put video on an iPod, either. He changed that tune as soon as the dollar signs started dancing in his head.)

That's because the "social" idea itself isn't broken. It's sound.

The problem is that Zune's implementation of the social idea is broken. In Zune's case, the players are so scarce, you'd need a 100-mile Wi-Fi range to find another Zune owner. Worse yet, the execution of the wireless share-and-play system is so hobbled by rights squabbles and stupidity that it's proved to be completely useless.

For instance, many tracks simply can't be shared at all, because Microsoft has somehow not managed to obtain or attach the proper permissions from the copyright holders. Then, the Zune isn't even smart enough to tell you up front which songs are shareable, meaning you go through the rigmarole of trying to send songs only to have the device tell you, a minute later, that there are no share rights. Annoying for sure. But it gets even worse!

Don't play nice together
First, a word on the much-whined-about, three-play digital rights management (DRM) technology for sharing. For purchased songs or those ripped from CDs (and therefore lacking DRM completely), I think a three-play model is absolutely reasonable. Anyone who says otherwise is just pining for a way to duplicate songs with no payment whatsoever. But try removing such restrictions on a wireless-networking-enabled device, and the record companies would never make a tune available for download again.

However, there's absolutely no reason whatsoever for the Zune DRM system to apply the same limitations to tracks shared between users who have paid up for the Zune Pass "all you can download" subscription model, as we have at our home. This is one of those music "rental" services, where the tracks eventually stop working if you don't keep your subscription up. (A great way to try out all sorts of stuff you'd never consider paying a buck a track for.)

Here's the problem: The device already knows who's got a valid subscription, and which songs have been downloaded via subscription service. So how on earth is the software too stupid to put one and one together and give a free pass to songs legitimately shared between two subscription-paying Zune owners? That's a question we might want to ask Microsoft's supposed Wunderkind, J Allard, the guy in charge of Xbox and Zune. I doubt we'd get an answer, however -- because I don't think he has one.

Zune's foibles are annoying enough that I've stopped trying to share tunes across the pair of Zunes that inhabit my home. And if I'm not doing it, I'm pretty sure no one else will, either. If no one cares to share, there's no social aspect. At least not for the Zune. Which means, more than ever, that there's no reason for anyone to buy a Zune.

Little things, bit effect
Trying to be a good shareholder, I've sent most of these points to the Zune team via Microsoft's PR firm. But I've got no idea whether they'll really get through, and I have no faith that they'll matter even if they do. Clearly, no one on the Zune team took home a pair of these things, set up the subscription model, and played in the real world. Or if they did, and reported the annoyances, it got one of those "we'll fix it later" kind of responses.

That's precisely the point. Apple gets the details right from the beginning. Jobs and his desi