Microsoft's (NASDAQ:MSFT) Zune has been the butt of digital media player jokes for some time. Is Mr. Softy gearing up to have the last laugh?

Windows Mobile blogging site turned heads this morning by posting apparent specs of the new ZuneHD, which is supposed to hit the market in the fall. An alleged snapshot makes the new Zune look freakishly similar to Apple's (NASDAQ:AAPL) iPod touch, capacitive touchscreen and all.

By now, you should be jaded enough to approach any leaked snapshots and spec sheets as bogus until proven factual. The Web is ripe with Photoshop-savvy pranksters and motivated firestarters. However, this doesn't mean that investors should dismiss all chatter, especially when it's clear that Microsoft is in no hurry to bury the Zune, despite its lackluster market acceptance.

Hit the specs
If the rumor proves true, the ZuneHD will be a pretty impressive beast. It may look like a "me-too" Apple gadget, but it also might bring a lot of new things to the table:

  • Beyond AM and FM radio, or the contents of its 16- or 32GB flash drives, ZuneHD will reportedly also receive HD Radio broadcasts. This fledgling digital format allows conventional radio stations to offer more channels within the same frequencies -- typically narrow music niches with minimal advertising -- making it a factor that Sirius XM Radio (NASDAQ:SIRI) can't entirely ignore.
  • The report also says the device will play 3D Xbox games. Some have suggested that enhanced games -- way beyond the casual gaming now available on smartphones -- will be possible if the ZuneHD integrates NVIDIA's (NASDAQ:NVDA) Tegra chipset, but the blog has not confirmed that spec.
  • Speculation suggests that ZuneHD will eventually be powered by Windows Mobile 7, giving the device a high-end mobile browser, and likely refueling speculation that a Zune smartphone isn't far away.

Add it all up, and even if only a few of the whispers are legit, the ZuneHD could have a shot at the big time.

A history of silence
Microsoft's entry into the portable media player market in 2006 was uninspiring. It did raise the bar with its wireless social sharing feature, but no one seemed to care. The Zune couldn't compete with Apple's entrenched iTunes ecosystem; it didn't even have a shot at the silver medal, because SanDisk (NASDAQ:SNDK) was cornering the market as the anti-iPod substitute.

Microsoft spent a ton of dough on artsy but ultimately ephemeral commercials promoting the Zune, to no avail. Even GameStop (NYSE:GME), a video game retailer practically oozing with Microsoft-fanboy customers, stopped stocking the Zune.

For all of Microsoft's might and money, the Zune had to settle for a mere 4% of the market as of a year ago.

Q1 2008

Market Share









Source: NPD Group.

The empire strikes Bach
Mr. Softy could have quietly axed the Zune last year. That would have helped the company avoid the leap year fiasco over the holidays. Zune could have even have died a year earlier, instead of unveiling an updated model in 2007 that did little to move the market-share needle.

Has Zune outlived its irrelevance? Microsoft wouldn't have kept the Zune alive for this long if it wasn't part of a larger master plan. Microsoft is doing well with its Xbox 360 and its Xbox Live Marketplace, but it remains the only video game console maker without a handheld gaming device on the market.

At least one analyst was "fairly certain" last fall that Microsoft had a standing order to buy Research In Motion (NASDAQ:RIMM) at $50. The BlackBerry maker ultimately traded as low as $35.09 in December, and Microsoft didn't move a muscle. Could it be holding back from taking on Apple in the smartphone market because it has an in-house solution coming Zune -- er, soon?

I don't know how much of the ZuneHD chatter going around is true. Those who do know probably aren't talking. However, I'd be surprised if Microsoft kept a fringe device on life support for three years only to let it die in vain.

Sooner or later, Microsoft will get the Zune right. And when that day comes, the words "brown Zune" will no longer be an easy way to garner cheap laughs.