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Thursday, October 04, 2007, 11:00 am PT (02:00 pm ET)

New Zunes likely to cannibalize everything but iPod - analyst

A new line of Zunes introduced by Microsoft earlier this week signal forward progress for Microsoft in the digital media player market but pose a larger threat to the company's own partners than Apple, according to one Wall Street analyst.

"We view these new models as decent progress by Microsoft compared to the previous Zune, which interestingly Microsoft plans to continue selling," American Technology Research analyst Shaw Wu told clients in a research note Thursday. "However, as we have long believed, we view the Zune as more of a competitive threat to its Windows Media partners including SanDisk, Sony, Samsung, LG, Verizon, Toshiba, and Philips as opposed to Apple and iPod."

According to Wu, the portable media player market is essentially divided into two "camps" — there's the "iPod + iTunes" camp, which represents the de facto industry standard, and then there's "everyone else." And while Microsoft now has a more competitive product line than it did last week, it still has no answer to the iPhone, iPod touch, and most importantly, the top-selling new "fat boy" iPod nano, he said.

In speaking to clients, the analyst said he found it "interesting" that the Redmond, Wash.-based software giant was matching Apple penny for penny with its $249, $199, and $149 price points on the new Zunes. However, he strongly believes that the company was unable to undercut Apple due to the iPod maker's world-class supply chain which gives it access to the lowest cost components, manufacturing, and distribution.

"We believe Microsoft will need to price much more aggressively in order to stand a chance against Apple," the analyst wrote. "We believe these Zune will likely continue to see modest success due to Microsoft's vast resources and strong brand name, but likely at the expense of its Windows 'partners'."

Wu advised clients to buy shares of Apple on any pull-backs in the stock price, saying he sees upside to his $185 price target in the next 6 to 12 months.

"While we remain concerned with potential softness in US consumer spending, it appears that Apple is once again positioned to buck the trend with its compelling product line and strong international exposure," he told clients.