Can Zune Pass or Napster Beat iTunes?

Microsoft’s Zune group has been running an ad for the last couple of weeks showcasing a financial analyst arguing that it will cost you $30,000 to fill an iPod, while a Zune only costs about $15 a month. This week, Napster, now under the Best Buy brand, is re-launching with $5 a month streaming service and the ability to keep five tracks a month. Napster was the original music service to beat, but unfortunately the company didn’t have rights to the music it was giving away for free, and theft turned out to be a bad business model. A group of us now have a running bet on how long it will be before Napster shows up as a downloaded application for the iPhone and iPod Touch.

Let’s talk about whether either of these efforts: one from the largest software company in the world, and the other from the largest consumer electronics retailer in North America. Can either ever even dent iTunes, let alone take the leadership position?

iTunes: The Big Target

Leading the market, as iTunes does, places a huge target on you, and every other product developer in your segment wants a piece of your business. Apple was vulnerable during the first couple of years of iTunes existence, but it has nearly locked up the market now.

Apple has around 80 percent of the current market, and iTunes music is still mostly protected by DRM, making it difficult to move to other devices (you have to burn it then rip it to pull off the DRM one song at a time). You can pick from a number third party tools, but the process isn’t legal, and the process isn’t particularly easy. Plus, you run the risk that some of these tools may also contain spyware.

iTunes and an iPod Touch

In addition, there are a massive number of iPod accessories and cars that will only work with iPods, making it even more difficult to move to another service. Finally, while there may be other services that are better, for the most part, iTunes appears to be “good enough” which, in an entrenched vendor, is typically good enough. Its new stand out feature is the application store, and while this doesn’t work with all iPods, it does provide a nearly unique experience with the related, ever-more-versatile offerings.

iTunes’ weaknesses are few, but important. It only works with computers and with Apple devices. If you like someone else’s portable MP3 hardware, and have a lot of DRM-protected iTunes music, you are out of luck. The platform doesn’t support subscription or streaming services yet, which is important because content providers prefer streaming for the difficulty of copying it, and for users it is typically easier and cheaper to keep refreshed. That’s why I’m hooked on Slacker, myself.

Napster

This offering looks like someone missed a meeting. The only reason for Best Buy to even offer a music service is to increase store traffic and sales. This may suggest there will be cool hardware and related accessories coming, but as of launch, it feels incomplete. Nothing that I can see even remotely makes sense from Best Buy’s perspective.

For instance, Best Buy likes to sell hardware, but with this service, the streaming part only works with PCs, and has nothing in it that would drive you to buy a new one. Yes, you can put five songs per month on your MP3 player, and in a very short 12 months you’ll just about have an analog car disk system’s load of music. To fill up an iPod would take a little over 16 years, and before you’re a fifth of the way through, much of your music would be obsolete. In addition, there is no loyalty element, suggesting that even if they did get some folks, Apple (or someone else) could easily target this base and get them back.

Napster Streaming Service

It’s a steaming service, which does address one of iTunes’ shortcomings, but you can’t use this if you aren’t connected, and while it may work with Sonos, the streaming service won’t work with any hand held players. I think you’d be better off with Slacker, which you can run on an iPhone or iPod touch, and that company at least has a caching p¬ortable player. My guess is that this is only the start of something, which is why it seems so incomplete.

Zune

Ah Zune, so much money, so little market share to show for it. The Zune is a true subscription service, and historically a better competitor to the iPod. The hardware has continued to improve, though Microsoft has yet to bring to market anything like the iPod Touch or iPhone. A handheld gaming device connected back to the Xbox franchise is supposedly in the works, which could be interesting, as well as an iPod Touch like Zune HD (by the way: These two devices may actually be the same device). Neither of them exist yet, and the financial argument breaks down when you realize that folks largely play music they already have on CDs and rip to iTunes.

Leaked Zune HD Photo

The Zune service, from a standpoint of usability and experience is rated by some as better than iTunes, which puts Microsoft in the Apple-like position of the smaller vendor with a seemingly better product and a relatively small market share. Here, it often seems like Apple and Microsoft have switched traditional places.

Microsoft wrote the book on taking on a larger competitor using a strategy called “embrace, extend, and extinguish.” To make this work, it will first have to find a way to embrace the iTunes user base, and then ease them into a better service. While Microsoft could bridge the music issue by reading the iTunes music inventory and duplicating it with Zune music, the hardware interface poses a bigger problem. If Microsoft can’t find a way for a Zune to work in an iPod world, they simply won’t have the opportunity to challenge Apple, let alone displace them. Now if they could take a universal tool, like say, Sync, they might have something.

Wrapping Up

Apple would probably be smart to stay worried, but its biggest short-term threat probably comes from from folks finding that music listening fits well inside a multi-function device, like a phone where Apple isn’t as dominant. (It may get its butt kicked by the Palm Pre. I’m told, for instance, the WSJ’s biggest Apple fan Walt Mossberg loves it). But displacing a dominant vender is incredibly difficult; it takes more than just having a few advantages – something Apple has learned in its decade-long battle with Microsoft. Napster is simply too unfinished to be much of a risk, and until Microsoft remembers how to embrace the iPod user base, it too is blocked from much of the current market.

However, with an Xbox portable player coming along, as well as some other hardware, Microsoft could capture more of those that don’t now have iPods. We’ll have to revisit this when the Napster solution is complete, and Microsoft’s new hardware and related offerings become visible. Until then, the crown sits uneasily on Apple’s head, but it remains there nonetheless. That company isn’t standing still, either, with at least one snazzy new iPod, and an iPhone refresh due in a few weeks.

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