Zune iPhone Competitor Likely to Fail

By Rob Enderle April 20, 2008

Microsoft just completed the acquisition of Danger and many have concluded that this means a Zune phone is coming. Microsoft is denying that they will do a Zune phone, but given that the folks who were promoting “Plays for Sure” at Microsoft weren’t even aware of Zune until it was made public, you have to wonder if there is another surprise coming.

Let’s look at the possibility of a Zune phone this week and whether Microsoft can or will pull it off.

What Created Zune

The reason Zune was created came from the belief in Microsoft that their “Plays for Sure” partners simply didn’t understand that to compete with the iPhone you needed a robust backend solution like iTunes that was tightly coupled with the device. With “Plays for Sure” you had devices and you had services but the two were loosely coupled and the running joke in the initial year was that “Plays for Sure” didn’t play for sure.

So a skunk works project was started that created the Zune offering and with a huge amount of effort focused on doing the Zune music service to address what Microsoft believed was the major competitive shortcoming. Only now they discovered that hardware was also important (duh) and that people simply don’t buy things that aren’t particularly attractive.

It was ironic that while Microsoft actually created a better video player in the initial Zune and second generation Zune hardware than Apple, they didn’t address video in the service (Zune Marketplace) and therefore was at a disadvantage to the Apple iPod Video.

The Probability of a Microsoft iPhone

The critical part of the decision to create the Zune was the belief that partners couldn’t compete with Apple even with Microsoft’s help. This isn’t true in the phone market which was mature when Apple entered and where Apple has become a force in only one small, though very lucrative, segment. This market is largely controlled, at least in the US, by the carriers and while many might argue (and I’d likely agree) that the carriers are often clueless, Apple has only been able to partially mitigate this control problem and it is unlikely Microsoft will become a carrier in an attempt to solve it.

In addition, with carriers, Microsoft’s relationships are actually stronger than Apple’s because Microsoft supplies multiple solutions with multiple partners to multiple carriers while Apple only works with AT&T in the US (and a limited number of carriers worldwide). Like most Apple partnerships, these are often troubled. Of course the reason they are troubled is because Apple takes more control of the customer than any other phone vendor and that is what better assures the customer experience. So while AT&T and others could be happier, iPhone customers likely appreciate Apple’s role (and it has certainly paid off for Apple).

But the problem for Microsoft, unlike it was with the iPod, is not the manufacturer alone but the carrier and to do both would be daunting. I’m not saying they might not eventually feel they have to create a Zune phone but that the distance is vastly farther, vastly more risky, and given the lack of significant success with Zune so far, doesn’t assure success with the phone version. So near term I don’t expect a Zune phone exclusively from Microsoft. But, once MIDs become real in the 2010/11 time frame this could change depending on how successful Apple and Microsoft are in the meantime.

Zune Spin Out?

We may see the future of MP3 players increasingly as Smartphone’s, which Apple seems to be anticipating itself with the iPhone. This view appears shared with the cell phone companies and is likely the reason why few have themselves brought out MP3 players which otherwise would seem to be a natural extension for them (Samsung is one of the few exceptions). This anticipated evolution should eventually force Zune to either fade away like PDAs or force them create a Zune phone.

This would suggest that eventually Zune could be spun out of Microsoft if they wished to avoid conflicts with their cell phone partners and that then this unit would then be free to develop and sell a Zune phone. The only reason this wouldn’t eventually happen were if the iPhone were to start failing or if the Zune platform was no longer seen as viable either of which is possible in a highly competitive market although both outcomes seem unlikely now.

Timing for Microsoft Danger Phone

Given the merger was just completed; having something by the end of this year seems very unlikely. However, by the September of 2009 I would expect this new Microsoft/Danger platform to be cooked and we might even see some prototype devices at CES in January of 2009 as Microsoft moves to build interest for these then future devices.

Can Microsoft Beat the iPhone?

Now building a phone that can beat the current iPhone is certainly possible. However, Apple will be working on their 3rd or 4th generation iPhone by that time and probably have a line of phones either in market or due to market spanning a number of price points. This is because it would be foolish for Apple to stand still and Apple is rarely foolish. So Microsoft won’t be competing with the current iPhone but a future more advanced version that will likely come in a variety of prices and sizes.

The key will be in being able to match the iPhone where it is the most powerful (design, user experience, marketing), and excel in one or more areas where Microsoft should be able to do better (email, web, productivity) so that the Apple phone looks limited when compared to the Microsoft based device. Microsoft will have an inherent advantage in not necessarily being tied down to a single hardware line or carrier, and an inherent disadvantage in not being able to control the user experience (this has typically worked to Apple’s advantage).

So the Microsoft/Danger phone will likely come through a partner rather than the Zune unit initially and the most successful offering will probably be from HTC or Samsung both of whom seem to get the importance of design. Currently the most successful Microsoft based Smartphone’s are the Samsung Blackjack II, the HTC Tilt, and the HTC Touch. Though Asus has some interesting designs, particularly their Lamborghini phone, M930W, and M536 that makes me think there could be an upset. These phones are based on the Windows Mobile 6 and 6.1 platforms are impressive efforts from any company.

To beat the iPhone, Microsoft and their partners have to step up to being competitive in areas where they haven’t been traditionally: Demand generation marketing, user experience, and coordinated hardware design. I think design and user experience are doable, but demand generation marketing is something I have a hard time finding in anything Microsoft. But, this is a brand new Microsoft team so history won’t be a good measure of future success or failure. Microsoft should be able to beat Apple, but should and did, as we saw with the Zune, are two very different words. Unless Microsoft can close the marketing gap the odds still favor Apple.

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