You can say one thing about Microsoft (NASDAQ:MSFT): It sure has moxie.

As the media circus gathered yesterday for today's Apple (NASDAQ:AAPL) "Let's Rock" media event, Microsoft tried to steal some of that thunder by revealing details of its newly revamped Zune media player. Silly Microsoft! You can't compete against a three-ring circus when all you have is a juggling act.

Coming Zune
The details of Microsoft's update would be grand, if not for the ubiquity of the iPod. In a nutshell:

  • The new Zune players will feature expanded storage capacity, with up to 120 gigs (or 16 gigabytes for the lighter flash-based model).
  • On the software end, the Zune's built-in Wi-Fi will allow owners to purchase downloads directly through their devices.
  • Songs identified from the Zune's built-in FM receiver can also be purchased.
  • Taking a page out of the proven Netflix (NASDAQ:NFLX) playbook, a recommendations engine will suggest potential purchases based on personal listening habits.
  • The new Zunes will come with puzzle-solving and poker games.

Greater storage capacity is nice, but it's not going to be a deal-clincher. Increasing storage is evolutionary, but certainly not revolutionary. Boosting the Wi-Fi functionality is golden, but the iPod touch has also made the most of its Wi-Fi feature, offering online surfing and access to the breakthrough App Store.

That last point is important; while the Zune may come with a pair of free games, iPod touch and iPhone owners now have access to hundreds of free games, as well as premium titles from the industry's biggest developers.

In addition, Zune's ability to identify -- and digitally purchase -- songs playing on FM is nice, but who buys a portable media player to listen to the ad-saddled, repetitive drivel clogging terrestrial radio? Meanwhile, iPod touch owners can stream Pandora, CBS' (NYSE:CBS), and Time Warner's (NYSE:TWX) AOL Radio whenever they're in a Wi-Fi range, while iPhone owners can do so anywhere. 

In short, the Zune is taking steps in the right direction, but it's moving too slowly to catch up with speedy Apple.

Plan C for Microsoft
Microsoft sold its 2 millionth Zune earlier this year. Congratulations! That's ... uh ... a little more than 1% of the total iPod units that Apple has moved. Microsoft's overall market share is greater than that, since Apple owners tend to ditch their old iPods for shiny new ones, but all this effort for a market-share pittance is an embarrassment.

Microsoft doesn't have to be the best at everything it does. After all, it's not the top dog in video game consoles, Web search, or marketing campaigns. However, it can't afford to be a laughably distant player.

The Zune's zalvation?
The only Hail Mary passes left to Microsoft here would involve transforming the Zune into a handheld computing device, a smartphone, or a portable video game system.

Each pass has its drawbacks. The Zune is too small for any material computing. Going the smartphone route would set Microsoft's Windows Mobile back elsewhere, since handset supporters would no longer see it as an agnostic platform. That makes taking on the PSP and DS in the handheld gaming war the best approach.

For starters, it would get the Zune back into the good stocking graces of GameStop (NYSE:GME). Adding gaming is also a natural attack, given Microsoft's growing base of Xbox, Xbox 360, and Xbox Live marketplace users and downloadable games.

If broadband-enabled Xbox machines will allow for the streaming of Netflix-subscriber movies later this year, why not do likewise for the Zune when it's connected to Wi-Fi? Sure, it cuts down on the portability, but it would certainly make captive moments -- like waiting for a delayed flight in a Wi-Fi-enabled airport -- more bearable.

Ultimately, Microsoft can't simply follow in Apple's footsteps. It needs to make its own tracks. Portable media gadget makers like Microsoft and SanDisk (NASDAQ:SNDK) will never be more than fringe players until they become revolutionary instead of evolutionary.

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