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Saturday, January 24, 2009, 02:00 pm PT (05:00 pm ET)

Microsoft's Zune crashes as iPod sales grow

Microsoft's Zune hit the ground even harder in its third holiday quarter. After two years of annual sales that barely reached the million unit mark, the company reported a major new drop in device sales for the winter quarter.

Microsoft's latest 10-Q filing stated that "Zune platform revenue decreased $100 million or 54% reflecting a decrease in device sales." The music player's sharp decline in revenues helped erase 60% of the company's earnings in its Entertainment and Devices Division, which includes the Xbox gaming platform.

Apple's iPod business, once feared to be at a dead end with satiated demand, hit a new quarterly unit record with sales of 22.7 million units. That's just 3% higher than the company's sales in the year ago quarter, but demonstrates a demand for innovative products even in the midst of difficult economic times.

Apple's record iPod sales don't include the iPhone, which Apple has referred to as its "best iPod yet." With iPhone sales, Apple sold over 27 million mobile devices last quarter, and over 208 million in total since it began selling the iPod.

Key to Apple's success has been its efforts to remain differentiated with unique features while also staying familiar and easy to use with the company's iTunes software. Microsoft's Zune debuted with some unique features, but the company's software churned as MTV pulled its URGE store from Windows Media Player, forcing the company to ship an entirely new, unfamiliar, and not quite functional Zune 2.0 desktop app.

Last year, Microsoft released a new software update but no significant new hardware refresh, leaving the tarnished brand without anything new to sell just as Apple continued to redefine its iPod line with a revamped, Internet browsing iPod touch. A rumored Zune partnership with Nokia also failed to materialize.

Apple's strength in digital media sales within iTunes also helped to keep the iPod in the leadership position among music players, holding on to 71% market share. Growth in iPod touch sales was particularly fueled by its new designation as a handheld gaming platform, leveraging the support the iPhone Apps Store has received from developers.