Beyond Binary

After a decent freshman year, the Zune appears to be having a bit of a sophomore slump.

In its first year on the market, Microsoft shipped 1.2 million Zunes, reaching about 3 percent of the U.S. market for MP3 players by the first quarter of 2007. A year later, the company's market share stands at about 4 percent, but that slight gain comes as Microsoft has expanded from one hard-drive model into a family of products that includes both flash-based and hard drive-based units.

As part of its announcement of a Zune video store this week, Microsoft noted that it has now sold more than 2 million Zunes. That would appear to show that business is not growing much despite the expansion of the product line. (And, to get a sense of where the competition is, Apple sold more than 10 million iPods in just the non-holiday January to March quarter).

For their part, Microsoft Zune officials say they're pleased with where things stand, reiterating that they see their effort to form a serious rival to the iPod as a years-long project.

Jason Reindorp, director of product marketing, said the company has shipped roughly a million devices since the second-generation models debuted in December.

"I'd actually say that's pretty good," Reindorp said. The company said it feels it has succeeded in its goal of being seen as a credible alternative for those who don't want an iPod.

"The strategy has been really focused on getting in the game," he said.

The company has been criticized for being slow, though, to match Apple features, taking more than a year to start selling video despite the fact that its initial model came with a large color screen and video playback abilities.

Microsoft also misjudged initial demand for the flash-based Zune last year. In gearing up for the holiday season, Microsoft assumed demand would be highest for those models, and boosted production of those at the expense of the hard drive-based models. Demand turned out to be higher for the 80GB hard drive model, which ended up being in short supply.

Reindorp said that demand has evened out some in the ensuing months, although Zune still has a far higher share of the hard drive-based MP3 market than it does in either the flash-based or overall market.

Much of Microsoft's effort, Reindorp said, has been around building the service connected to the Zune, particularly its social elements. In addition to the video store launched Tuesday, Microsoft also added new social capabilities, such as the ability to share with friends an electronic "Zune Card" that allows them to access playlists of your favorite and most recently listened to music. Those who take part in Microsoft's subscription service gain access to the songs themselves, as well.

Gartner analyst Mike McGuire said although the social aspect to the Zune is a good idea, it also complicates life for Microsoft, which not only needs to try and match Apple on the hardware and software fronts, but also to compete with other social music services such as Imeem and Last.fm.

"Zune's trying to be all of these in one place," he said. "I think it's a tougher sell with Zune."

Of course, Microsoft is plugging ahead with plans to expand the service as well as the number of devices that can connect to it.

"This fall, expect to see a new wave of devices," Reindorp said, noting that the company has established a pattern of updating the Zune software in the spring and introducing new hardware in the fall.

But Reindorp said Microsoft thinks of the dedicated portable player as just one of many "tuners" that could potentially connect to the Zune service. The company is looking at how desktop software, online services, other portable devices, and even cars might be able to connect into the Zune service.

"We've said all along that, being a software company, we are much more focused on the experiences we can bring to life through the software," Reindorp said.

One area in which the company is looking to make changes is its subscription service, known as Zune Pass. Today, consumers pay $15 a month to access an unlimited number of music tracks, though all of those songs expire if consumers stop their subscription.

"We believe today the Zune Pass model is pretty darn good, but it could be better."

Asked whether Microsoft is locked to the notion of being the only maker of Zune hardware, Reindorp said the company would consider allowing others.

"It's an interesting idea to explore," he said. "It's something the company has tried in the past and we had some successes and some failures."

A year and a half after debuting its first Zune, Microsoft is finally offering some content that makes use of that big color screen.

The software maker is releasing an update Tuesday to its Zune service that adds a video store with about 800 TV show episodes from NBC Universal, MTV, and a couple of other producers. For the moment, though, the store is far smaller than the TV options from iTunes or even from Microsoft's own Xbox Live Marketplace and offers no feature films.

"We feel it is more important and--customers tell us--to focus on short programming first," said Julio Estrada, general manager of Microsoft's Zune Social unit.

Microsoft also still has no connection between the Zune store and its larger online download site, Xbox Live Marketplace, which sells movies and TV shows directly onto the Xbox. Programs bought on the Xbox still can't be transferred to the Zune, although Estrada notes that video stored on a Zune can be played on an Xbox-connected TV.

That said, the Zune store can boast one thing iTunes doesn't have--the latest episodes of The Office and other NBC shows. NBC pulled the plug on iTunes downloads last fall in a dispute with Apple.

Of note, given that NBC supposedly wanted pricing freedom from Apple, all of the initial Zune videos from it and other content providers will cost roughly the same $1.99 they fetch on iTunes. Estrada said Microsoft could offer lower prices on some content down the road, as well as offer "premium content" at a higher price.

Zune enthusiast sites predicted the video store might be coming after seeing a video tab referenced in some Zune screenshots. It is not, however, the unified Xbox and Zune store that some say Microsoft has in the works.

In another change, Microsoft is trying to further play up the social component of the Zune. The spring update allows users to share their "Zune Card" with friends. With that card, one Zune user can get access to another friend's music playlist, including a list of favorite tracks selected by the user as well as an automatically generated list of songs that the friend has been listening to recently.

And there's the rub. There's no wiggle room. Although I could edit my playlist to reflect what I perceive as the most impressive of my musical likes--R.E.M., Juanes, and Tracy Chapman--anyone I share my Zune card with would also see that I have been listening to Wilson Phillips. (I mean if I were, which I'm not. I admit nothing.)

Estrada conceded that could be an issue, but said Microsoft thought the advantages of dynamically updated content were worth that risk.

"We did not want to constrain the freshness of that list," he said, but added, "We, of course, will continue to listen to user feedback and adjust accordingly."

Another sharing feature will allow those who use Windows Live Messenger to share with their buddy list the song they are playing using the Zune desktop application. That feature will be optional, he said.

Microsoft now faces a lawsuit over recent problems with its Xbox Live online gaming service.

Three Texas residents filed a lawsuit Friday on behalf of themselves and others who have had trouble connecting to Xbox Live in recent weeks.

The suit, filed in U.S. District Court in Houston, claims Microsoft's outages represent a breach of contract and negligent misrepresentation for which the software maker is liable. The suit doesn't claim specific damages, but notes the amount is in excess of $5 million.

In the suit, the plaintiffs allege that Microsoft should have known strong holiday sales would tax its servers. "Microsoft knew the increase in subscriptions would increase game-play on its servers, yet failed to provide adequate access and service to Xbox Live and its subscribers."

Microsoft has apologized for the outage and said it would allow Xbox live subscribers to download a free game.

A Microsoft representative was not immediately available for comment.