Few have accused Microsoft of
being first to the market. But plenty have learned
the hard way that the company can be very good at
sneaking up from behind.
That's the tack Microsoft Corp. is hoping to take
with entertainment. The software maker has invested
years of effort and billions of dollars in
entertainment endeavors ranging from television
technology to video game consoles. What's more, it
has said that it's willing to spend much more money,
and take much more time, to see if those investments
pay off.
Its latest effort, the $249.99 Zune portable player
and music service, debuts Tuesday and marks one of
the most high-profile attempts to take on Apple
Computer Inc.'s iPod and iTunes powerhouse.
Analysts don't expect the early effort to make a
serious dent in Apple's market share.
"It's not even going to give the iPod a bad headache
for the time being," said analyst Michael Gartenberg
with Jupiter Research.
Still, Gartenberg says Microsoft's competitors may
have reason to be wary of what the company's deep
pockets and dogged persistence could accomplish in
years to come.
For Redmond-based Microsoft, which rakes in billions
from its highly profitable Office business software
and Windows operating system franchises, it may seem
strange to put so much emphasis on digital
entertainment businesses where profitability can be
much trickier.
But analyst Toan Tran with Morningstar says the
company could have little choice but to get into
those businesses. That's because entertainment
devices, which are now used for everything from
storing photos to playing video games and watching
movies, are increasingly encroaching into the turf
Microsoft has tried to hold onto with the Windows
operating system that powers most PCs today.
"Microsoft wants to get into the space because it's
a very big market and the PC is not the center of
the world anymore," Tran said.
Microsoft says it's grown interested in
entertainment because technology now plays a bigger
role in the way people do everything from watch
television to listen to music. Robbie Bach,
president of Microsoft's entertainment and devices
division, said that's a change that plays to
Microsoft's strengths.
Still, Microsoft has yet to figure out how to make a
lot of money at this new game.
While it has earned a following with the Xbox
console and its online gameplay service, Xbox Live,
the effort is still losing money. It could also take
four years or more before the Zune effort is
profitable. Overall, Microsoft's entertainment and
devices division lost $96 million in the quarter
ended Sept. 30.
The Zune launch also follows on the heels of another
Microsoft-backed digital music effort, called
PlaysForSure.
In an interview Monday, Chief Executive Steve
Ballmer said Microsoft will continue to support the
companies that make PlaysForSure devices and
services. But he said the company decided to also
launch its own Zune product, which isn't compatible
with PlaysForSure, after seeing that that effort
wasn't doing much to temper Apple's momentum.
"We said, if we just keep on our current model, it's
unclear that we're going to expand our footprint in
these portable devices," Ballmer said.
Microsoft also is hoping to differentiate itself
from Apple with Zune's built-in wireless connection,
which allows users to share songs with other nearby
Zune users. Ballmer said that idea grew out of the
success Microsoft has had with Xbox Live, in which a
technology became a forum for gamers all over the
world to build a community.
Gartenberg, the Jupiter analyst, said cash-rich
Microsoft can afford to be persistent and try new
ideas in taking on market leaders such as Apple or
Sony Corp. It's a luxury available to few other
companies, he said.
"They've learned that they can buy market share," he
said.
Bach concedes that things like Xbox and Zune will
never enjoy the profit margins Microsoft can boast
from Windows and Office, but he insists the company
is not spending irresponsibly.
"We're not in this just because it's fun to do. We
think we can make good money doing this," he said.
For now, however, the expectations are much more
restrained. Bach said he'd consider Zune a success
this holiday season if people simply decided that
Apple had a viable competitor.
"Apple's obviously still going to be the leader. I
think that's fair. But we want them to see Microsoft
and say, 'These are the guys who are going to give
Apple a run for the money," Bach said.
Some users may not realize that Microsoft is behind
the effort -- the company's name doesn't appear on
the actual gadget. As Microsoft tries to build its
entertainment presence, Bach says it's no accident
that its own name has been downplayed.
"We have to have something that is relevant to
people who are music enthusiasts, and while
Microsoft is a great brand name it's, you know, not
the first word that comes to your mind when someone
says,'Hey, music!'" he said.
Still, the company is upfront about the fact that
its high-profile name is part of what has made
people notice Zune more than the other iPod
competitors.
"The instant viability that we have in the space, if
you can call it that, is in large measure a function
of the fact that it is Microsoft," said Bryan Lee,
corporate vice president for Microsoft's
entertainment business.
Microsoft also has made no secret of its eventual
goal to more closely intertwine its various
entertainment offerings, although it's been murky on
the details. In general, Bach said he expects the
products to be more closely linked through its
Live-branded online services. These offerings span
the entire company, and include Xbox Live, the
Windows Live Web search effort and an Office Live
offering for small businesses.
Microsoft also says it would make sense to link its
entertainment offerings more closely with its
Windows operating system. Ballmer notes that the
company has sold 20 million copies of a version of
Windows that is geared toward entertainment, and
says that is a big part of the company's overall
strategy.
J Allard, corporate vice president for design and
development in Microsoft's entertainment and devices
division, said the company hasn't offered more
details on how its offerings might be linked in part
because it would like to wait and see what users ask
for, or seem to want.
Even though it's still hard to predict when or how
much Microsoft's entertainment investments will pay
off for investors, Morningstar analyst Tran said he
thinks Microsoft is doing the right thing.
"The name of the game in technology is change, and
if Microsoft doesn't invest and adapt they're
eventually going to be irrelevant," he said.
Leadership Focus
