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Friday, September 15, 2006, 09:25 am PT (12:25 pm ET)

Apple's video iPod pricing catches Microsoft by surprise

Microsoft on Thursday official unveiled its Zune digital media player but refused to provide pricing details, likely because it was caught off-guard by Apple Computer's aggressive new pricing on its video iPod line, one Wall Street analyst says.

"Microsoft formally announced its Zune portable media player, with specs in-line with Toshiba FCC filings," American Technology Research analyst Shaw Wu told clients on Friday. "However, pricing and timing were not revealed likely because our sources indicate that Apple's aggressive pricing at $249 for its new 30 GB video iPod took Microsoft by surprise."

It has long been rumored that Zune, which also features a 30GB hard disk, would retail for $299. But Apple's unparalleled component supply pricing is allowing it to price new iPod models at levels in which no other corporation could both compete and turn a profit.

"We believe Microsoft is re-thinking its pricing strategy amid potential wider losses to stay competitive in the marketplace," Wu wrote in his note to clients. "We remain underwhelmed with the much-hyped Zune, which is essentially a repackaged Toshiba Gigabeat, with limited differentiation vs. existing Windows Media devices.

Still, the analyst believes Zune will likely see some modest success due to Microsoft's vast resources and strong brand name. However, he expects this to come at the expense of its Windows Media "partners" including Creative, SanDisk, Sony, Toshiba, Samsung, iRiver, Archos, and others.

"Interestingly, Microsoft also hinted that it is working on a Zune cell phone (no timing announced)," Wu added. "We are not surprised by this as we believe that all PC vendors will likely participate in the cell phone space over time due to ongoing convergence in computer and communications technology."

In a research note released earlier in the week, Wu said he was both impressed and surprised by the progress Apple made in the key iPod areas of battery life, higher resolution video, and user interface. He said these enhancements to the new iPod lines will further distance Apple from its competition.

"To us, battery life has been the central issue with the previous video iPod and also in the development of its next-generation widescreen video iPod," Wu wrote. "With the advancements in battery life of over 70 percent (30 GB video iPod moves to 3.5 hours from 2 hours, 80 GB video iPod to 6.5 hours from 4 hours, and nanos to 24 hours from 14 hours), we believe Apple is one step (or perhaps two steps) closer in adding widescreen and/or Bluetooth capabilities."  The analyst added that he now has higher conviction that those capabilities will show up in a device some time during the first half of 2007.

Wu reiterated a "Buy" rating on Apple shares with a price target of $91, saying the company's competitive advantages and growth prospects remain amongst the strongest in large-cap technology.