July 25, 2006 4:00 AM PDT

Swan song for Microsoft's music allies?

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SanDisk, meanwhile, said Microsoft may alienate consumers by too closely imitating Apple's closed approach--that is, by making the Zune player and service work only with one another.

"Based on what they have publicly said, we believe that Microsoft will mimic Apple's proprietary closed-system solution, SanDisk CEO Eli Harari said Monday on the company's earnings conference call. If so, that could allow SanDisk's Sansa player, among other devices, to succeed with a more open approach, particularly at the low-end of the market. "The partnerships that we are developing with the various music services will become more visible in the coming quarters and will further enhance the Sansa user experience," he said.

The move does represent a new direction for Microsoft, which has historically left the hardware business to its partners, with the Xbox game console being the primary exception.

The company has been working for months to integrate MTV Networks' Urge subscription music service into Windows Media Player 11, which will be built into Windows Vista and will be available for download for Windows XP. The company released a test version of Windows Media Player 11 in May.

Microsoft's decision to create its own player and software follows a long effort by the company to tackle the iPod without entering the market with its own device.

After finding that the software and devices using its technology were not working well together, Microsoft in 2004 devised its PlaysForSure program, which aimed to indicate, using labels, which products worked with its music technology. But the branding effort was not as successful as hoped: Confusion remained over which players worked with subscription services, among other concerns. Microsoft has since revamped the program to be more clear. The company has also put its focus on promoting a few players and the Urge service more heavily.

IDC's Kevorkian said it's not as if Microsoft's partners haven't gotten the wholehearted support of the Windows Media team. The Zune service comes out of the Xbox side of the company and has been developed largely in parallel with the PlaysForSure products. "What this likely speaks to is different strategies being worked out within the ranks of Microsoft," she said.

But, Kevorkian said, the arrival of Zune is an indication the PlaysForSure effort had not managed to compete well against the iPod. "It hasn't fully realized its potential," she said. "Now that Microsoft's attention may be focused on building its own device and service, it remains to be seen where PlaysForSure goes, if anywhere."

Even for Microsoft, maintaining a dual approach could be tough.

"Operationally, that's really complex," said Gartner analyst Michael McGuire.

One of the questions, though, is whether Microsoft wants to stay in the hardware business in the long term, or if it would consider getting out of it at some point.

"Is that a skill set they want to have forever, or is this a short-term necessity?" McGuire wondered. If it is the latter, there could be a new opportunity for the hardware makers.

Sasse, for one, seemed open to that. He noted that iRiver was already a licensee of Microsoft's portable-media center design.

"It has been a model that worked," he said.

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