It's been a bad month for Microsoft (NASDAQ:MSFT) Zune dreamers.

Was that a Zune that President-elect Barack Obama was working out with in a gym? Nope -- that story proved to be inaccurate, as Obama's campaign contacted the reporter to clarify that the next leader of the country jams exclusively with an Apple (NASDAQ:AAPL) iPod.

Is a Zune phone hitting the market early next year, to combat the popularity of Apple's iPhone and Google's (NASDAQ:GOOG) Android offspring? Speculation there was snuffed out by industry blog Gizmodo last night. Zune product manager Brian Seitz is confirming that there won't be a Zune-backed wireless handset at next month's Consumer Electronics Show.

Sure, a smartphone with Zune compatibility would have been a dud. Earlier this year, Zune had just 4% of the digital media player market, badly trailing category-killer Apple and even distant second-place finisher SanDisk (NASDAQ:SNDK).  

Q1 2008

Market Share









Source: NPD Group.

The real key to a Zune handset would be to cash in on Microsoft's Xbox 360 diehard gamers and make it a multipurpose communications, multimedia, and gaming portable device. Sony (NYSE:SNE) and Nintendo (OTC BB: NTDOY.PK) have handheld players to match their consoles, so why not Microsoft? Anything short of that doesn't make a whole lot of sense. Microsoft is too big and powerful to support a niche device with limited appeal for too long.

So, sure, maybe we don't get the Zune phone device next month. Maybe we never get a ZuneBox handheld gaming device. Absent either scenario, can anyone see Microsoft's two-year-old player making it to its third birthday?

2009 has to be a big year for the Zune, or it will likely be its last.

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