Zune vs. iPod: The Battle for Home Domination-- by Nate Winter

Microsoft has launched the Zune. But why is this predictable foray into portable media so interesting? After all, Microsoft is the most powerful technology company in the world with other experience in mobile devices such as the Windows Mobile operating system. Why is the Zune a big deal? Here’s why: Because the future of home entertainment is at stake and because, for once, Microsoft is an underdog.

Portable MP3 players are not important because of their sales, their branding, their image, etc. Microsoft and Apple don’t really care about how many iPods are sold or how many Zunes are sold. Yes, there’s boat loads of revenue to be had by both parties, but revenue on portable MP3 player sales is near-sighted. The battle is not over bragging rights, it’s over the living room. The physical portable device that plays music, views photos, and shows video is almost immaterial. The end game is software. Whose software will become the standard when a computer centrally controls all home entertainment? Will a home’s music files be .m4a files controlled by Apple’s iTunes or .wma files within Microsoft’s Windows Media Player? The answer to that question is what drives Microsoft into the portable media player market with the Zune.

Microsoft wants to make its proprietary .wma and .wmv file types the new .doc and .xls, making Microsoft the undisputed king of entertainment software as it is for office productivity.

The market is too big to ignore and with too many implications for the future. Microsoft’s advantage is its existing entrée into home entertainment with its Xbox and Xbox 360 gaming consoles. Microsoft has successfully leveraged its strengths with software development, peripheral devices, and home networking to claim a powerful first strike into the consumer entertainment arena. And while the Xbox brand’s success has been formidable, its products lack the “every man” quality of an iPod.

If the battle is truly for market share over home entertainment and not revenue, the victor is clearly Apple. Compare an Xbox console (original or Xbox 360) with accessories, game sales, and subscription fees for the Xbox Live service to an iPod (model and size are irrelevant) with accessories and purchases from the iTunes music store. I won’t go into specific detail, but it seems likely that an Xbox generates more revenue for Microsoft than an iPod does for Apple. However, Apple has the advantage because sales of little iPods (with their free iTunes software) dwarf those of Xbox. It’s hundreds of millions of little sales conquering over millions of great big sales.

Because so much rides on the software standards for home entertainment we should expect to see heavy deals promoting Zune sales after the holidays. I won’t be surprised if we begin to see offers for a free Zune with purchase of Microsoft’s new operating system Windows Vista or Microsoft Office 2007 or even new PCs down the line.

What the world really wants is some truly universal formats. But I suspect that most people aren’t aware of that need yet. We’re still in those “pissing contest” days of VHS vs. Betamax, HD DVD vs. BluRay, and iPod vs. Zune.

--Nate Winter