Analysts praise Microsoft's early moves in the digital music player market, but warn that the company will have to work hard to overtake Apple's iPod.Microsoft finally put weeks of rumors to rest and confirmed on July 21 that it is preparing to compete with Apples iPod and iTunes music service.
The question Microsoft will now have to answer is whether Zune, the companys upcoming digital music player, software and music content service, will be good enough to become an "iPod killer."
Analysts say it is too soon to tell for sure.
"Consumers will decide if this is an iPod killer," said Susan Kevorkian, a consumer markets analyst at IDC, in Framingham, Mass. "A lot depends on the various features and if they can work together seamlessly and what kind of content the company can offer. A lot remains to be seen."
In its announcement, Microsoft, in Redmond, Wash., declined to offer many details about Zune, other than that it should be ready in time for the Christmas holiday season.
Apples iPod and iTunes have dominated the digital music market for years.
Click here to read more about Microsofts confirmation of the rumors that it will produce its own digital music player.
Apple estimates that it owns about 75 percent of the market. In the third quarter, Cupertino, Calif., company reported that it had sold 8.1 million iPods, down about 5 percent from the second quarter, but still the dominating the digital music player market.
Kevorkian said she believes that Apple will unveil some new iPod products by September, possibly including a second-generation iPod Nano with the ability to play videos, as a way to counter Microsoft and boost sales.
In its pursuit of the digital music market place, Microsoft will have to compete against Apples proven platform.
"In our view, Microsofts confirmation on the Zune project proves once again our thesis that a bundled offering between a player and a content delivery service is the only formidable way to compete with the iPod/iTunes bundle of Apple," Tsvetan Kintisheff, the founder of Kintisheff Research, based in Sofia, Bulgaria, wrote in a research paper.
Kintisheff added that Microsoft has already taken the first step by creating a partnership with MTV called Urge, an online music superstore that allows consumers to tap 100 CD-quality radio stations, a 2-million-track song library, videos, and other content such as news and blogs for the MTV, VH1 and CMT channels.
Click here to read about how iPod and Mac sales helped Apples third-quarter earnings.
Rick G. Sherlund, an analyst at Goldman Sachs, headquartered in New York, wrote in a research paper that Microsoft is in a good position to tap the lucrative digital music market.
"Apple iPod clearly dominates, but Microsoft has the ability to differentiate itself in the areas of wireless networking, social networking, and connectivity to other Microsoft offerings such as Xbox Live, media center PCs, stereos, IPTV, and Xbox 360," Sherlund wrote.
However, by offering its own music products, Microsoft will also compete against its own partners, like Creative Technology, which use its software in their own digital music players, said Michael Gartenberg, vice president and research director at JupiterResearch, in New York.
Gartenberg said he believes that Microsoft has to build a "competent challenger" that will give consumers features that they want, such as Wi-Fi. However, the company has to distinguish its product from the iPod.
Microsoft also has to compete with the lifestyle appeal Apple has been able to foster through its iPod and iTunes marketing.
"The devil is in the details," Gartenberg said. "Apple has shown that it can take on all comers in this space. Its not just small players like Creative, but companies like Sony that owned portable music devices for many years. Apple knows the market and the message it creates with its devices resonates well with consumers."
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