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Wednesday, August 30, 2006, 07:45 pm PT (10:45 pm ET)

Sources: Microsoft ramps Zune, sales goal set in millions

AppleInsider has learned that despite ongoing software interface testing, Microsoft Corp. this month began manufacturing its much-anticipated Zune digital media players overseas.

People familiar with Microsoft's portable media strategy say the company commissioned the release of the 30GB, Wi-Fi-enabled media player to manufacturing partner Toshiba several weeks ago.

The Redmond, Wash.-based software giant has since been slowly ramping production with hopes of selling 3 million of the $299 players by the close of the holiday shopping season, those same people said.

For Microsoft, that means selling at least a million of the players each month beginning in October. That's a little less than one fourth the number of iPods Apple Computer is expected sell during the same time period. Though the majority of the players Apple is expected to sell will feature flash memory-based storage, not hard disk storage like that employed by Zune.

Still, it's unclear in what month Zune will be introduced into the market and go on sale. A spokesperson for Microsoft called recent Web rumors of a mid-November launch "rumors and speculation," but otherwise declined to comment on any other aspects of this report.

Come year's end, there's likely to be a large discrepancy between the number of Zunes Microsoft will have shipped and those that were actually purchased by customers. That's because insiders say the company plans to literally stuff its retail and distribution channels with more units than it actually anticipates selling.

The risk of stagnant post-holiday Zune inventory — due to channel stuffing — is not a primary concern for Microsoft, sources say. The company has already gone on record in saying that Zune will initially be a profitless venture and that it plans to spends hundreds of millions in marketing dollars chasing Apple's iPod dominance over the next several years.

In an initial attempt to set Zune apart from the iPod, Microsoft is betting big on the inclusion of wireless capabilities. FCC filings uncovered last week confirm that Zune users will be able to share media content wirelessly with one another and create wireless "DJ" streams that other users can tune into.

But already, analysts are waving caution at Microsoft's decision to build a wireless chip into the player, out of concern that it will take a hefty toll on battery performance.



"While we find Wi-Fi a nice feature, we believe that Wi-Fi power requirements are still quite steep and so we are skeptical that battery life will be strong on Zune," American Technology Research analyst Shaw Wu told his Apple investors in a research note on Wednesday.

Wu said his analysis of Microsoft's wireless implementation indicates a Zune with Wi-Fi enabled will only sustain between 3 and 6 hours of battery life compared to 10 to 14 hours achieved by a typical iPod.

Wu was similarly unimpressed by the player's user interface, raising objections to what he called a "fake click-wheel that does not scroll nor is touch pressure sensitive making navigation difficult, particularly for users with large music, video, and photo libraries."

For similar reasons, the majority of Wall Street analysts polled by AppleInsider said they are expecting Microsoft's initial Zune manufacturing ramp to tap out at several hundred thousand units, rather than several million.

But those views are strongly opposed by insiders who have been briefed on the device. They believe Zune stands to be a strong competitor to the iPod and that Microsoft is preparing for a war to the finish this holiday shopping season.

According to those insiders, its only a matter of weeks before Microsoft's Zune faces off against Apple's must-have gadget of the year — expected to be a chic new version of the iPod nano, clad in colorful metallic enclosures and featuring increased storage capacity.