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Friday, June 16, 2006, 07:00 am PT (10:00 am ET)

Reuters: Microsoft readying Apple iPod rival

Microsoft Corp. is laying the groundwork to compete against Apple Computer's iPod digital entertainment device and iTunes service, sources familiar with the plans told Reuters on Friday.

The world's largest software maker reportedly held licensing discussions with the music industry to create its own music service.

At the meetings, an entertainment device that plays videos and music was also demonstrated, according to Reuters' source.

Microsoft has previously denied having aspirations of entering the digital music business, currently dominated by Apple in the United States.

On Thursday, the Redmond, Washington-based company announced a two-year transition process that will ultimately end with the departure of chairman Bill Gates.