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Microsoft’s iPod Killer Emerges

Rumors have been coming fast and furious over the last month about Microsoft’s (MSFT) entry into the digital music player business. The NY Times broke the story today with multiple confirmed sources, turning rumors into fact.

Engadget has dug up some interesting rumors that go beyond what was reported in the New York Times today.

Microsoft’s new portable audio and video player will have a screen that’s “bigger than that of the iPod video” (which isn’t really saying much) and built-in WiFi so you can not only download content directly to the player, but actually participate in an Xbox Live-like social network that will help you connect with other people with similar taste and interests. Whether that’s going to be the Live Anywhere service they introduced at E3 we don’t yet know.

Microsoft has already sunk a huge investment in the Live service for interconnecting Xbox’s and creating a user community. It’s a very well received service. The new Windows Media 11 is also a sharp improvement and is planned to integrate into the Live network.

To attract current iPod users Microsoft is going to let you download for free any songs you’ve already bought from the iTunes Music Store. They’ll actually scan iTunes for purchased tracks and then automatically add those to your account. Microsoft will still have to pay the rights-holders for the songs, but they believe it’ll be worth it to acquire converts to their new player.

The dirty little secret about Apple is that even though it is by far the #1 retailer of digital music, they simply just don’t make that much money from it. One billion songs on iTunes is one Billion dollars in revenue since the service was initiated. Apple makes far more money on selling the hardware. If Microsoft removes the biggest barrier to entry for consumers (sunk software costs) they could catalyze users, particularly Windows users, to switch to the Microsoft platform. One billion dollars is the kind of check only Microsoft (and maybe Google) can write.

Right now the new player is schedule to launch in November, but our source also tells us that Microsoft isn’t stopping with a WiFi-enabled PMP, they’re actually going to launch an MVNO next year using all Windows Mobile-powered HTC handsets. These handsets will let users connect to the same social network you’ll be able to access over WiFi using the portable media player.

This is huge. Microsoft is already the #1 provider of smartphone software in terms of unit volume (No, it is not Blackberry nor Palm/Treo). This was achieved by forging strong partnerships with hardware vendors like HTC (2498.TW), Motorola, and even Treo. This would allow the Live service to stretch virtually across every platform, from Cable set-top boxes running Windows Foundation, to Xbox 360′s, to small PMP’s to cellphones to desktop computers.

Too many people are attaching the term iPod killer to the new hardware Microsoft is working on. The real iPod killer will be the ability to scale the service across multiple platforms, something Apple simply cannot do, and it is an excellent example of the strength Microsoft can derive from its massive reach.

One thing that remains to be seen is what role Portalplayer (PLAY) might play in the PMP device. Microsoft has been working closely with them to create a hardware/software sync platform called Sideshow and it is possible that this will be the basis for communicating with this new set of mobile hardware devices Microsoft is working on.

The PMP initiative is really about preserving Microsoft hegemony as the uber-platform. The pain would really be felt in companies like Apple, Real, Yahoo, Google who count on entertainment hardware and services for a big part of their future growth.

Microsoft has a pattern of entering a business and sucking the profit opportunity out of it by incorporating it as part of its platform. Why should entertainment infrastructure be any different?

Discussion

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  1. Good analysis as usual.

    Could the ipod be just a flash in the pan? Apple stuff seems well done, but as you point out they will have a hard time addressing all markets / platforms. What would be the best way for them to extend into more areas? Acquisitions? Partnerships? Opening their standards?

    Oh, also, I am not sure that Microsoft is the #1 smart phone platform, I think worldwide Symbian is larger? http://en.wikipedia.org/wiki/Smartphone

    Posted by Paul Warner | July 8, 2006, 1:47 AM
  2. You can tell when an article is intended to create more heat than light when it describes the lack of profitability in Apple’s online music sales–something that Apple itself has openly acknowledged and has been a subject of discussion for years–as a “dirty little secret.” Either that, or the author of this piece hasn’t been paying attention to either the industry or the technology. Whatever the answer might be, the readers (and, more importantly, investors) are equally disserved.

    Turning to the “analysis,” the author makes a series of statements of dubious import. For example, he states that Microsoft will give away a billion dollars or so worth of music to get users to switch — allowing them to move their song libraries to an as yet unseen alternative to iTunes and the iPod. I suppose it’s believable, but why does it matter? Consumer surveys consistently show that people use the iPod and iTunes because of its ease of use, simplicity, and compatibility with the most popular music player in the world. Do some stay in the iTunes/iPod ecosystem because they cannot afford to walk away from a big music investment? Unlikely, because the same surveys show that few iTunes/iPod users have a big investment in iTunes Music Store Purchases. Of course, some might — but the author provides not a shred of evidence to back that up. Couple that with the fact that most iPod users’ libraries are filled mainly with their own ripped CDs suggest something that the author has pointedly overlooked — that, perhaps, iTunes/iPod users like Apple’s products and services. They just work. Microsoft’s plan to execute a billion-dollar “try me” bribe, then, will only be as good as the alternative it proposes. If history is any guide, to say that Microsoft’s offering will be underwhelming is, in fact, an understatement. And as far as execution is concerned, look at the current boondoggle surrounding Microsoft’s flagship offerings: Office and Windows. Heads are rolling left and right, delays mount upon other delays. As a careful investor, I’d have to wait this one out.

    Frankly, this “article” rests, ultimately, on the dubious presumption that Apple cannot scale the iPod/iTunes service across platforms, and, as a corrollary, that Microsoft can leverage an as-yet-untested ability to connect with a wide variety of platforms. Few of the Microsoft-connected platforms, by the way, work very well with media … just compare reviews of Apple’s media PCs vs. Windows media PCs. As for the latter, the majority of reviewer bemoan that they can barely get them to work, let alone reliably. Of course, Apple has the advantage of controlling the “universe” in which its media offerings can live — blending hardware and software that doesn’t have to live in the wilds of technology where Microsoft products must somehow co-exist. The Tower of Babel world of Windows-linked technology is about to get more complicated, too. Microsoft’s Vista, if it ever comes out, looks to have hardware requirements at least a generation beyond what most businesses and consumers have on their desktops — specs that would be overkill for Linux and even Mac OS X. We’re in the middle of a sea change, and betting on the lumbering Microsoft to kill the iPod/iTunes success story seems like a fool’s errand.

    It would great if Microsoft, with all of its money and personnel, would try something original. It seems to have this habit of watching from the sidelines to see what works and then flooding the market with an oftentimes clumsy, but predatorily priced, alternative. And oftentimes, like the X-Box, it can’t seem to find a way to make money. I’d be more inclined to bet on Microsoft if the company got its ship in order first — with Vista and Office — before taking the wheel on a specutive multimedia venture.

    With Apple apparently delayed in its next iPod offering, the next six to eight months ought to be interesting, at least.

    Posted by David Bertoni | July 10, 2006, 11:18 AM
  3. Since the iPod already works with Windows, Mac and Linux, it’s hard to claim that Microsoft will have an advantage. And it’s sad that the author is so poorly informed as to the facts.

    At the moment, this is just typical Microsoft vaporware, trying to drag down sales of the iPod without actually having anything to sell yet themselves. When they actually put out a product, then you can test it and declare it this week’s “iPod killer,” at least until the first set of sales figures come out.

    And when it flops, and Microsoft starts spreading rumors about their next iPod killer, you’ll drool all over that, too. Whatever happened to professional journalism?

    Posted by Andrew Coles | July 10, 2006, 1:33 PM
  4. Mr. Bertoni and Mr. Coles, i think the discussion is better served if you dissect the ideas rather than make personal attacks. It detracts from your arguments. In general, this is a great site.

    That said, I agree that Microsoft is likely to miss the mark, again. As an occassional user of MS Media Center, I am amazed that Mister Softee continues to struggle with basic user interface ease of use and has a terrible look-and-feel. They’ve sunk untold millions and time into development and this is what they have to show for it?

    Microsoft has made a living out of being a not-so-fast follower, but it also has a long list of flops: WebTV, Windows CE (‘Wince’), Windows ME and ‘Bob’ come to mind.

    The Engadget photos of the MSFT ‘ipod’ device also reflect Microsoft’s Soviet-era design sensibilities. Drab, drab, drab. MSFT can perhaps make it costless at the music file level to switch, but you still have to buy a new player — hard to see a compelling reason to change at this point (i am one of the few Creative flash music player owners, BTW). If they produce an innovative design and make it really seamless to use, then let’s talk about it.

    I think Apple actually has a golden opportunity to leverage its iPod success into other markets, particularly its long-rumored entry into the cell phone market (besides the ill-conceived ROKR). The cell phone market is increasingly playing to Apple’s innate strengths: industrial design, multimedia and ease-of-use. Since the unit opportunity is between 900 million and a billion phones this year, I wonder what is taking them so long?

    Posted by ChipGeek | July 11, 2006, 11:58 AM
  5. Spelling and punctuating correctly would enhance readability and credibility. Its/it’s, “i before e except after c”, the basics.

    Posted by muleslimejaws | July 13, 2006, 11:56 AM
  6. Two abused apostrophes and one mispelling fixed.

    Thanks for the heads up. But write me a check, and I’ll hire an editor.

    Posted by Andrew Schmitt | July 13, 2006, 1:22 PM
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