Zune in Crisis: Holiday sales down 54%

Posted by Christian Zibreg

Chicago (IL) - Zune,
Microsoft's iPod rival, is not having its finest hour these
days. Holiday sales nosedived by a whopping 54%, eating into
profits from the entire Entertainment and Devices Division. Pre-holiday price
cuts didn't help move Zunes off the shelves, and Apple's stellar iPod holiday sales helped cement Zune's
destiny. If Microsoft doesn't come up with a better business plan - one that
should call for a touch-based model that could actually be a rival to iPod touch, and an App
Store-like model with third-party applications - then Zune could easily never
recover from this disaster.

Do you remember Zune? It was Microsoft's answer to the ubiquitous iPod. According to Microsoft's disappointing quarterly earnings report and the company's latest 10-Q filing though, Zune sales nosedived sharply amid stronger than ever holiday iPod sales.
The filing states, "Zune platform revenue decreased $100 million or
54% reflecting a decrease in device sales."
Zune's decline also
contributed heavily to a 60% drop in earnings for Microsoft's
Entertainment and Devices Division - which also includes their Xbox consoles.

Although Zune failed to position itself as a viable iPod
competitor, the latest holiday results are total carnage and must've been a real eye-opener for Microsoft. Especially since Microsoft offered
$10 to $20 holiday discount in an effort to boost Zune sales, which did little
to change its fate. The company shipped barely one million Zune units
in its first two full years on the market.

Apple sold nearly 23
million iPod units during holiday quarter alone, excluding iPhones
which come with iPod functionality built-in, which is a 3% year-over-year unit growth - a modest growth during times of economic
prosperity but a significant achievement in current economic slump that
actually proves how much consumers are still interested in iPods despite financial crisis.

In total, Apple sold over 200 million iPod units since the music player
hit the market on October, 2001. The iPod currently dominates with 71% of
the music player market. With the current sales trend, iPod stands a chance
of dethroning Sony's Walkman as the best-selling music player of all

Microsoft last updated Zune
in October of last year, just day before Apple's iPod media event. The
company kept the form factor intact, but added new colors to the mix: A
120GB hard drive model and 16GB flash model. Zune's software was also updated to version 3.0
that added new features to all Zune models, including even the
first-generation ones. The new software tapped the built-in FM and Wi-Fi
radios to provide features like Buy
(from FM) that allows users to tag a song and purchase it from
Zune Marketplace using Wi-Fi hotspots.

Other notable additions
included Zune Channels, a radio station channels and celebrity channels
that push new music to subscribers' collections each week and two new
games, the first ever for Zune. In addition, Microsoft cut a deal with
McDonald's to give free wireless access for Zune owners at their 9,800 fast food
restaurants via ISP Wayport - mirroring a similar deal Apple has in
place with Starbucks.

All of the above didn't help, despite the fact that Zune upgrades were viewed as more substantial than Apple's September refresh
of the iPod lineup (which basically came down to iPod nano redesign and
storage bump across the family). Finally, a rumored alliance with Nokia to
make the Zune phone didn't see light of the day, and most analysts think it never will despite ongoing speculations.
Perhaps the most limiting factor of all is the lack of a touch-based
media player with Internet functionality in the Zune lineup that could
challenge the iPod touch  + App Store combo.

efforts to replicate their all-in-one iPod approach centered around its
iTunes content store worked (to some extent), but the company received a
major blow when MTV pulled URGE from Windows Media Player. The Zune desktop
application that was released to replicate iTunes functionality is
still too buggy to be reliable, plus it's a bit rough around the edges to compete
with the long polished iTunes interface. In addition, Zune Marketplace did not eclipse the sheer amount
of content offered on the iTunes Store - which remains the biggest online
content store in the world.