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Monday, November 13, 2006, 08:45 am PT (11:45 am ET)

Microsoft begins uphill battle against iPod on Tuesday

Although it's seen as the most legitimate competitor to Apple Computer and the iPod+iTunes franchise thus far, Microsoft Corp., which launches its Zune digital media player and compatible music service on Tuesday, has its work cut out for it.

Priced at $249 with 30GB of storage, Zune will enter the market at relatively the same cost as one of Apple's video iPod models. Microsoft is betteing that some of the player's unique features will act as selling points, such as its built-in FM receiver and wireless sharing capabilities.

While an FM receiver is one of the most highly requested features for the iPod, one Wall Street analysts is skeptical that Zune's wireless capabilities will act as a catalyst to help spur sales of the bulkier, heavier iPod rival.

"If, at some point, there are millions of Zunes in the market, the wireless sharing capability may prove to be a more compelling feature," PiperJaffray analyst Gene Munster told clients on Monday. "We do not expect to see a material impact on iPod market share from the Zune over the next 2 quarters, unless Microsoft starts a massive marketing effort within the next few weeks."

For its part, Microsoft has vowed to spend hundreds of millions of dollars over the next several years to promote its Zune brand and close the gap on Apple's iPod. But as Munster told clients, expectations of any immediate results may be far fetched.

"Media and analyst coverage of Zune has been high, but we believe public awareness of Zune is still low at this point and would need to grow significantly in the coming weeks for Zune to have an impact on this holiday season," he said.

Munster said Microsoft plans to spend several years developing various other gadgets under the Zune brand, which likely translates into Apple having a clear runway to grow its iPod footprint and expand its own offerings before Microsoft has a real foundation in the space.

Microsoft's Zune digital media player


"Ultimately, it is possible that Microsoft will be better off for spending several years investing in this initiative, but unless Microsoft makes some inroads against Apple during the investment phase, it may prove to be too late to capture meaningful market share," he said.

Similarly, Munster is uncertain that Microsoft's emphasis on "community" features, such as wireless audio and video sharing, is optimal for driving growth in the digital media player market.

"We expect community features will become increasingly embedded in various services (and devices via wifi), including iTunes, but ultimately we believe that this is a device driven market and for Zune to be successful Microsoft must develop devices that capture customers from Apple," he said.