March 29, 2007 () Five months after its introduction, industry experts give Microsoft Corp.'s Zune media player barely passing grades in terms of its marketplace success while Microsoft insists the device is on course.
"I'd give them a B-minus," said Ross Rubin, director of industry analysis for market research firm NPD Group. Other analysts gave Microsoft roughly the same marks.
"We are very definitely on target," insisted Jason Reindorp, a Microsoft marketing director for Zune. He said there will be some changes in Zune's direction, including, possibly, a Zune phone, but said Microsoft is satisfied with Zune's progress.
However, citing market studies, the analysts note that Zune has yet to make a dent in the large market lead of Apple's iPod. They also pointed to five specific areas in which Zune must improve.
Where it stands
Five months out, here's where Zune stands, according to market studies.
NPD's figures show that Zune captured about 10.2% of the market for media players with built-in hard drives in December and just under 10% in January. Zune's market share slipped to about 8.7% in February.
Those numbers were roughly confirmed by Shawny Chen, a research analyst for Current Analysis, who said her statistics showed Zune with an 11% to 12% market share among hard disk-based media players. The two firms measure market share somewhat differently, accounting for the slightly different numbers.
Both analysts noted that hard drive-based devices only account for a quarter to a third of all media players sold. The rest use flash memory for storing media, so Microsoft actually has only a small percentage of a small percentage of the market.
Microsoft's Reindorp did not dispute those numbers.
"We're pretty content that they're tracking how we've been spending our marketing money and where we are in the product life cycle," he said.
So far, Microsoft has failed in one of their market goals -- to take market share from Apple Inc.'s iPods, Rubin and Chen agreed. Rather, it has taken sales away from smaller vendors, most notably Creative Labs, which previously was in second place behind Apple.
"It makes sense they'd pass Creative because smaller companies with lower marketing budgets will get trampled by a company like Microsoft," Rubin said.
To put the hurt on iPod, Microsoft must deal with some serious issues, the analysts agreed. Here are five steps they said Microsoft must take to get itself into the game.
1. Forget the social
Microsoft tried differentiating Zune by stressing how its built-in Wi-Fi capabilities would allow users to exchange music with other Zune users. Zune's marketing mavens called this capability "the social." That was a bad idea and should be dropped as an emphasis in Microsoft's marketing efforts.
"You need people around you to share music and those people aren't there," said Max Freiert, marketing coordinator for Compete Inc., a market research firm.. "Plus, you can only share a song for three days or play it three times. Consumers won't put up with those limitations. It's almost a reason to not buy the Zune."
Microsoft's approach also shows that it doesn't understand how social networking works.
"The thing about social networking is that it's promoted by the people who use it," said James McQuivey, principal analyst for market research firm Forrester. "YouTube isn't successful because it had a major national ad campaign. It's successful because the guy who posted a video told his friends about it. The same is true with music sharing -- it has to be done from the bottom up."
Microsoft's Reindorp didn't disagree with that assessment, at least not very strenuously.
"We felt we were addressing the social aspect of music, and the research we've done has shown that people understand the concept that wireless enables sharing," he said. "But the tagline, while provocative, hasn't meant a lot to consumers."
The analysts said Microsoft should focus on making the built-in Wi-Fi more useful.
"There are much better things to do with Wi-Fi," Freiert said. "For instance, using it instead of having to use a USB cable for synching would be huge." Reindorp said the company is definitely looking at other ways to make Wi-Fi useful, but would not be more specific.
2. Look back and look forward
Instead of focusing on its unsatisfying music-sharing scheme, Microsoft should focus both on the leading and bleeding edges of the marketplace, McQuivey said. In particular, Microsoft must do a better job of telling relative newcomers what Zune can do.
"Only 20 million homes in the U.S. have an MP3 player, so you still have to tell people what it's all about," he said. "It's not like trying to sell somebody a car -- everybody already knows what a car is. This is still a type of device that the majority of people need to be told what it's for."
Reindorp said a new marketing campaign will begin this spring that will, indeed, get more specific about what the device can do.
However, McQuivey also stressed that Microsoft also should try to expand the market by adding advanced features.
"They've made it clear they're competing with the video iPod, but [Zune]is a me-too product," McQuivey said. "They have to decide if they want to follow the market or drive it." He added that, without advanced features, Zune could lose market share to new products from both Apple and other competitors.
"We'll be seeing the Sansa Connect [from SanDisk] which has Wi-Fi, and this summer we'll see the Slacker, which will be Wi-Fi enabled with some of the functions of satellite-based delivery so you can get music no matter where you are. [Microsoft has] to jump on the next wave of devices."
Reindorp said that new devices will likely be available for the next holiday season, and one of those devices could be a Zune phone. Apple has made a huge splash by introducing its iPod phone.
"Regarding a phone, of course we're looking at it," Reindorp said. "Whether we do it depends on whether our consumer research shows there's genuine interest, but the idea of having all this stuff on a phone is interesting. We just need to validate the hypothesis before we charge into that space."
3. Get some flash
A 10% market share isn't much to brag about, particularly when that's only 10% of the small hard disk-based media player market. What Microsoft desperately needs is a flash-based player, the analysts agreed.
"Microsoft needs an entry-level or lower-priced flash model," Chen said. "They're targeting a younger audience and those people don't necessarily have a lot of money. With Apple, a lot of people start with a Shuffle or nano, then upgrade."
Developing a flash-based player was one area in which Reindorp was circumspect.
"We're looking at how we can evolve the device family in terms of new shapes, price points and technology," he said.
4. Push subscriptions
One of Microsoft's biggest potential assets is currently a liability: Its use of a subscription model for providing music to its users.
Like the iPod/iTunes combo, Zune is paired with Zune Marketplace, from which users can purchase and download music. However, unlike iTunes, users can also subscribe to Zune Marketplace and, for about $15 a month, download all the music they want. They can continue to play the music on their Zune as long as they keep paying the monthly fee, kind of like paying rent for the music.
Similar plans are available from other vendors such as Rhapsody and Napster, but Apple has stoutly resisted offering a subscription option, insisting that customers don't want it. However, McQuivey said the subscription approach could become a key point of differentiation for Zune.
"Subscription music is a benefit that almost nobody understands," McQuivey added. "But the reaction is amazingly positive once people try it. If I were in Microsoft's shoes, I'd focus on the benefits of subscriptions, how, if you use the device that way, you can get millions of music tracks overnight."
Added Chen: "They haven't exploited [subscriptions] enough. They have to go back to when Apple first started and they used iTunes as a way to sell iPods."
Reindorp said the subscription service is essential to Zune, but Microsoft is looking at new options.
"The subscription service was a solid move on our part," he said. "We've seen 65% growth in our subscription base, although the number is still small. It could be better and it could become different -- we're looking at what other flavors of subscriptions there could be."
Among the options the company is looking at is pricing the subscription service like cell phone service.
"We've been looking at the subscription model where you pay a certain amount and you essentially get the cell phone for free," he said.
5. Make it sexy, make it work
Few would maintain that Zune is as sexy as the equivalent iPod. Nor does it have as many features. Both are issues that Microsoft must address soon, Rubin said.
"The devices itself isn't as sweet and sexy as the market-leading competition," Rubin said. "And they have a lot of catch-up to do in terms of features -- podcasts, games and things like that. These are personal entertainment devices and these devices need more sex appeal."
Insisted Reindorp: "Sexy is a subjective term. But in our research, the colors and color treatment scores high. Also, we're looking at an urban, inner city demographic, and some say that demographic leads fashion trends and we score well with that demographic."
Not the least of that catch-up has to do with simply making the device work well. Some Zune users expressed their vexation in blogs that the product was buggy and, this week, Microsoft released its third Zune firmware update. That update addresses problems related to synchronization and songs downloaded from Zune Marketplace not playing back correctly.
Overall, Reindorp said Zune's first five months have gone about as expected.
"We're looking at the introduction of Zune as being a matter of months and years, and not weeks and months," he said. "Stay tuned because we're going to continue enhancing the design of the devices."