Zune Success: Competing With the iPod

For some time, many of us thought that Apple, with respect to the iPod specifically, was invulnerable. It didn’t matter who ran against them from Sony to Microsoft – Apple squished their little bodies and left them bleeding in the streets.

But, as a lesson to all of us, it’s important to remember that everyone has weaknesses and that anyone can make a mistake, with the 80 GB Zune potentially the product that showcases that Achilles heel. In fact, right now the 80 GB Zune is sold out nationwide and eBay speculators are selling them for $70 over list price if you’re desperate.

Now, whether it is Microsoft or Apple we’re talking about, competitors don’t move against either goliath unless the company has provided a welcome opening. So let’s start off by recapping the mistakes that Apple may have made that gave Zune the opportunity to come in and eat its lunch, and then take another look at why the second generation Zune has legs.

Apple’s Slip

When Apple brought out the iPhone, the move signaled agreement with what many of us had been thinking for some time – that the iPod and other standalone MP3 players were about to become obsolete and would soon be replaced by phones that could do the same thing. The only problem, and it is a big one, is that the iPhone is to phones what the Porsche is to cars: While beautiful and desirable, it is also priced well above most folks’ comfort level both in terms of initial price and ongoing service plan.

In addition, as well crafted as the device is, it isn’t a great phone by any stretch and isn’t a particularly nice Smartphone either, suffering in this latter regard from having a touchscreen rather than a RIM Blackberry-like keyboard. This doesn’t mean that the iPhone isn’t a wonderful gizmo, but its target market is a fraction of what the iPod market is. In effect, it made people unhappy with their iPods, but was also priced so high it couldn’t coax an upgrade from these now-unhappy iPod users.

The second opening was created by the iPod Touch. Based on the iPhone and priced initially very similarly to it, the iPod Touch created an ugly choice with the iPod classic.

For some time, people buying iPods in the $400 range were buying them for sheer capacity and because they wanted to watch videos. But the iPod Touch maxes out at 16 GB while the iPod Classic, which costs less, can go up to 160 GB. Battery life has also been iffy, which even Walt Mossberg – who loves everything Apple – complained of in his review and seems to suggest may have been crippled to favor the iPhone (which is likely a more lucrative device for Apple).

Both the Touch and the Classic are further designed to source video off of iTunes. But while there are also products like Corel’s DVD Copy, Pinnacle Mobile Media Converter, and Roxio’s Easy Media Creator which allow you to convert video for use with these units, some don’t yet work with the iPod Touch well. What’s more, even when they do, the video has to be highly compressed, so converting a movie over can take much longer than it takes to watch the darn thing in the first place.

Therefore the ugly choice one must make is that you have to pick between video capacity and screen size when choosing an iPod, and then are forced to make another tough decision in terms of picking preferred features when selecting the Touch vs. the iPhone. Consumers don’t like ugly choices and tend to want a complete, one-stop offering, particularly if they are paying a premium for product.

Apple’s Retail Exposure

I ran into this when I did a review of the HP iPod deal and why HP ran away from it a few years ago. While there were a lot of reasons why that deal was a bad one for HP, in effect Steve Jobs had tricked HP’s then desperate CEO Carly Fiorina into reselling his product rather than bringing out their own. (HP really should have known better given Steve’s reputation in the Silicon Valley). The reason that is pertinent to this discussion is that the retailers hated Apple and were starting to paint HP with that same broad brush, which was hurting HP’s battle against Gateway and Acer in retail.

It is amazing how much the retailers dislike Apple, and the reason appears to be that typically, no matter how big the manufacturer is, they bend to the wishes of the retailer, yet Apple is the glaring exception to that rule. Apple expects the retailers to jump when they say jump and has no problem, at least from the perspective of the retailers, in shifting supplies to Apple stores when there is a shortage, thereby depriving these competing business of revenue. In short, retailers look at Apple more like they would typically look at a competitor and that is why they were so aggressive in terms of pushing the first Zune, even though it really was a wrongheaded product.

In short, the major retailers want Apple to lose for two reasons: They don’t like how Apple treats them, and they really don’t want anyone else to copy Apple’s behavior. This means they are more than eager for anyone, even Microsoft, to step in and sew up the lion’s share of the market, and will therefore promote these non-iPod offerings over Apple’s when given any opportunity.

Zune II

Happily, the second-generation Zune has very little in common with the first-generation product, and shows marked advancements on almost every front. Whereas the first generation offering was robust but, to be kind, not particularly attractive, the second-generation device is actually rather good-looking. It is still substantially more scratch-resistant then the iPod to boot, and can similarly be engraved to create a personalized gift.

In terms of video, it is vastly better that the sold-out 80GB product (though it doesn’t have the cool iPod touchscreen) and also doesn’t force you to choose between capacity and cool or demand you opt into an older “classic” design if you want the latest offering. The gadget additionally supports more native video types, and that makes video transfer much faster than any of the iPods. This is actually a big deal if you like watching films or TV shows, because compressing video for the iPod Touch and iPhone from MPG formats takes an incredible amount of time, even with high-end PCs doing the number crunching. (I use an 8-core Intel box for this myself).

I also think that for many, buying songs one at a time has gotten really old, as has buying and ripping CDs or being worried about the RIAA showing up at your doorstep with a bunch of attorneys because you may have shown up on some illegal music download site. The Zune solves some of these issues elegantly by having a subscription plan that allows you to have access to the entire Zune library for a monthly fee, and the new second generation gizmo will even wirelessly sync with your PC.

So the Zune is strong where the new iPods are weak, and has some advantages that, apparently, buyers value. Of course, it’s not going to knock Apple out of first place by any stretch of the imagination, but it could knock SanDisk out of second place because SanDisk doesn’t really have product that competes with the 80 GB Zune II.

Wrapping up and Adding Sync

Important to note: I’m an analyst, and as such, I look for trends. And Microsoft went from a joke last year to competitive this year, which is a massive improvement by any measure. Frankly, the company has improved dramatically in terms of usability, hardware design, wireless implementation and even pure out-of-the-box experience. The point being that if Microsoft keeps up this rate of improvement, what do you think next year’s products will look like?

Take a look at Sync. This is the Microsoft product that Ford is putting into their cars. It actually is vastly better, even with iPods, than the dedicated Apple solution that has been used in BMWs and Audis (I have the Audi solution), which kind of sucks. Not only does Sync work with the iPod – it works with most Bluetooth-enabled phones and most MP3 players. While Sync isn’t much better when it connects wirelessly (but it does do wireless, period, which the iPod solution doesn’t), when you hardwire the solution you get rich menus and much better control. In short, out of the box, Microsoft’s Sync is much more flexible and usable than what Apple is offering in cars and that is a first in this space for anyone.

One rule that has existed since Microsoft became known as a power is as follows: Don’t piss the company off, because then it focuses, and a focused Microsoft can be frightening. The iPod has been a huge embarrassment for Microsoft, and the Apple Mac TV commercials clearly got even Bill Gates’ attention. Microsoft is obviously upset and that is resulting in a level of focus that this product desperately needed to become successful.

Over the last couple of years, I’ve wondered if the glory days are over and whether Microsoft has what it takes to compete anymore. Interestingly, Zune II and Sync indicate that they do, and that makes me really look forward to Windows 7. We’ll see what that future brings, but for now, it’s just nice to have a real competitor to the iPod available. As you’re no doubt aware, we all benefit from competition because it makes everyone, even Apple, up their game.

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