Switched On: The music, the money and Microsoft

Ross Rubin at NPD Group writes his regular Switched On column at Engadget about Microsoft's rumored portable music player Zune. Rubin writes that "much of the discussion around Zune has focused on the strategy shift it would mean for the software giant and the competition that it would bring to Microsoft's current hardware partners. But the company's continuous user interface refinement of Windows Mobile and expecially its deep pockets can let it fight the iPod in ways that its current partners simply can't." Rubin points out three ways that Microsoft can best leverage its war chest:

1. Player subsidization. If the Xbox consoles have been any precedent, it's doubtful that Microsoft would lowball its player's pricing too much. The company would likely rather bring out a full-featured device that wins the hearts of early adopters. However, it could subsidize expensive advanced features that may be a bit ahead of the market. The rumored inclusion of WiFi would enable Microsoft to play upon one of the benefits of subscription services – legal peer-to-peer music sharing among devices of licensed content -- and allow a tighter level of integration with the Xbox 360. This could also drive a viral marketing effect. Indeed, Microsoft, more than any of its hardware partners, can justify subsidization because it could be considered investment in the future of the Windows Media licensing ecosystem – an interest in which its current partners are only tangentially vested.
2. One intriguing rumor is that Microsoft would offer iTunes Music Store's customers the option to repurchase all the songs they've bought as protected Windows Media files. This would certainly be a bold move that would remove one of Apple customers' barriers to entry, but it smacks of the kind of win-at-all-costs freebiemania of the dotcom era. Surely, there are already customers who have spent hundreds of dollars or more at the iTumes Music Store. Completely reimbursing those customers would essentially amount to giving the player away. Imagine if Microsoft had offered a free Xbox game for every PlayStation 2 game purchased when it entered the video game console market.
3. On the accessories front, Microsoft has been driving efforts by the Consumer Electronics Association to define a standard docking interface, enabling command and control, charging and playback like the iPod's. According to the company, USB currently simply lacks the technical strength to serve as a user interface for transferring music. While rumors have circulated that Microsoft has approached iPod peripheral makers, rest assured that Zune would ship with more than a slip pouch available for it in terms of accessories. Regardless of whether the likes of Griffin, DLO, Belkin and others sign on, Microsoft can afford to seed the market with its own branded products in advance of market acceptance and charge little or nothing to license the interface, aiming at another Apple revenue stream.

Rubin concludes with:

In a recent conversation with an executive at a company that sells portable music players, I asked what he thought about the possibility of Microsoft entering his space. He put on a brave face, touting the benefits of market expansion and a halo effect, but noted that anything could happen with the entry of the proverbial "800-pound gorilla." When I noted that in this market, Microsoft wasn't the 800-pound gorilla, he replied that any company with tens of billions on the bank is an 800-pound gorilla. We'll soon see whether it can drive Apple bananas.