Microsoft Shares Its Recipe for Zune's 'Secret Sauce'

By Mary Jo  |  Posted 2006-07-27

REDMOND – Microsoft is planning to invest "hundreds of millions" and lose money through 2008 to make its recently announced Zune portable media player a success.

Robbie Bach, president of Microsoft's Entertainment and Devices division, shared more details about Microsoft's vision for its iPod competitor with Wall Street analysts and press attending Microsoft's annual Financial Analyst Meeting here on July 27.

Bach leads many of the consumer-focused businesses at Microsoft. Gaming, TV, music, video, mobile devices, home-productivity and other entertainment-focused products and services are all part of his organization.

"Our secret sauce for tying all of these together is community and services," Bach said. "Services is a cornerstone to what we are doing."

Bach and other Microsoft executives speaking at FAM pointed to Microsoft's Xbox Live online service and community strategies as the model other parts of the company are striving to emulate.

When Microsoft launched the first Xbox console, the "attach rate" for Xbox Live was 10 percent. Currently, the attach rate for Xbox Live with Xbox 360 consoles is 60 percent. There have been more than 34 million downloads from Xbox Live Marketplace, Bach said. Microsoft believes it will be able to double the number of registered Xbox Live members from three million to six million within the next 12 months, he added.

Microsoft plans to expand its Xbox Live Arcade presence in the coming year; to add music and movie downloads to Xbox Live Marketplace; to launch a Webcam for Windows Live, as part of an "Xbox Live Vision" campaign; and to more tightly integrate advertising into games, Bach added.

Microsoft's plan with Zune is to emulate the integrated Xbox/Xbox Live hardware/software/services model, Bach said. Bach told analysts to expect it to take Microsoft at least three to five years to start making a dent in the portable-player market. Its first entry will be one new product which it will launch in the fall in the U.S., he said. Microsoft plans to expand its Zune line to encompass more kinds of players and other geographies next year.

Bach said to expect Microsoft to spend "hundreds of millions" – but not billions, as it has on the Xbox – on developing and marketing Zune. Microsoft expects to take a loss on Zune through fiscal 2008.

Zune isn't the only big bet Microsoft is making in the Entertainment and Devices division. Bach also will continue to post losses on its Xbox business through fiscal 2007 (which ends on June 30, 2007), he reiterated.

Microsoft is hoping to finally start seeing IPTV deployments in fiscal 2007, after spending substantially on IPTV pilots throughout the world. It has some serious catching up to do on the video front, especially in the personal video space currently dominated by YouTube. And Microsoft, like its partners, still has not made seamlessly connected entertainment a reality.

When asked whether Microsoft was abandoning its PlayforSure digital-media-connectivity initiative in favor of developing its own end-to-end Zune solution, Bach said Microsoft is planning to continue to back PlaysforSure.

"PlaysforSure continues as it is today," he said. In fact, the Zune team "will work with the same (PlaysforSure) interfaces," Bach said.

He likened the PlaysforSure/Zune paradigm to the PC/Xbox console one. The two teams will continue to work in parallel, with the hope that the two different environments ultimately will work together, Bach said.

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