Overly cautious Microsoft spurs first-ever Zune shortage

In a report Wednesday, the market intelligence firm said the well-reviewed model has been in short supply or backordered at many popular retailers like Amazon.com.

Creating some confusion, iSuppli noted, are media reports that have suggested that the Zune is outselling Apple iPods on Amazon.com, but the reality of the situation is those reports are referring to a sales spike for the older, deeply discounted Zune 30 model.

"The question is whether the 80GB Zune shortage is the result of high demand, short supply or some combination of both,” said senior consumer electronics analyst Chris Crotty.

Crotty added that, "Given the widespread criticism of the first Zune model, it is likely Microsoft erred on the side of caution when placing initial orders for the new Zunes, which include the Hard-Disk-Drive (HDD) based 80GB Zune as well as the flash-memory-based 4GB and 8GB Zune."

iSuppli in its report went on to suggest that Microsoft is moving tentatively in the portable media player (PMP) market because the company is treading some unfamiliar territory with the Zune.

"The first unfamiliar aspect for Microsoft is that the Zune uses a proprietary, closed operating system that differs from the open approach of the company’s flagship Windows software," the firm said. "Second, Microsoft is not the market leader in PMPs, an unusual situation for a company accustomed to dominating the areas in which it competes."

Still, Microsoft may feel a lot of self-imposed and media pressure to position the Zune as an “iPod killer.” To that point, iSuppli noted, the new 80GB Zune competes directly with the new iPod Classic and the new iPod touch.

And while the firm's channel checks indicate strong demand for the iPod touch, it calls the model "somewhat of a contradiction" because Apple added a video-centric display to the device even though it only has limited storage capacity for video content.

"That disconnect raises the question of why Apple did not launch an HDD-based iPod touch. Apple may have expected flash memory prices to drop more quickly. When that did not happen, Apple may not have had time to develop an HDD-based iPod touch," iSuppli said. "The question now is whether Apple will continue to wait for flash prices to fall, or if the company will add a HDD-equipped iPod touch during the coming months."

At the same time, the firm suggests that the current Zune shortage is unlikely an indicator of things to come, as Apple still maintains its long-term competitive advantages of ever-increasing cost for switching among its customer base. That is, the longer a consumer owns an iPod, the more content that consumer purchases from the iTunes site.

"To move to a non-iPod player, the customer would need to repurchase the content or reformat through a cumbersome process that degrades quality — and breaks the law," iSuppli said. "With its closed Zune system, Microsoft is trying to replicate these switching costs within its customer base, but the company may be starting too late."

As of press time, Apple's iPods dominated the first 9 slots on Amazon's best seller list, with Microsoft's black 80GB Zune snagging the 10th spot.