Kill the Zune, Microsoft

Why Mr. Softy should pull the plug on its troubled media player.

Rick Munarriz
Rick Munarriz
May 23, 2008 at 12:00AM
Other

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

71%

SanDisk

11%

Zune

4%

Creative

2%

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.


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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: