Microsoft takes aim at Apple with Zune

By Allison Linn

updated 2:59 p.m. ET Nov. 14, 2006

SEATTLE - Few have accused Microsoft of being first to the market. But plenty have learned the hard way that the company can be very good at sneaking up from behind.

(MSNBC is a joint Microsoft - NBC Universal venture.)

That's the tack Microsoft Corp. is hoping to take with entertainment. The software maker has invested years of effort and billions of dollars in entertainment endeavors ranging from television technology to video game consoles. What's more, it has said that it's willing to spend much more money, and take much more time, to see if those investments pay off.

Its latest effort, the $249.99 Zune portable player and music service, debuts Tuesday and marks one of the most high-profile attempts to take on Apple Computer Inc.'s iPod and iTunes powerhouse.

Analysts don't expect the early effort to make a serious dent in Apple's market share.

"It's not even going to give the iPod a bad headache for the time being," said analyst Michael Gartenberg with Jupiter Research.

Deep pockets, dogged determination
Still, Gartenberg says Microsoft's competitors may have reason to be wary of what the company's deep pockets and dogged persistence could accomplish in years to come.

For Redmond-based Microsoft, which rakes in billions from its highly profitable Office business software and Windows operating system franchises, it may seem strange to put so much emphasis on digital entertainment businesses where profitability can be much trickier.

But analyst Toan Tran with Morningstar says the company could have little choice but to get into those businesses. That's because entertainment devices, which are now used for everything from storing photos to playing video games and watching movies, are increasingly encroaching into the turf Microsoft has tried to hold onto with the Windows operating system that powers most PCs today.

"Microsoft wants to get into the space because it's a very big market and the PC is not the center of the world anymore," Tran said.

CNBC VIDEO The Zune cometh Nov. 13: Microsoft fires a shot squarely across the iPod’s bow. "On the Money's" Julia Boorstin reports. CNBC

Microsoft says it's grown interested in entertainment because technology now plays a bigger role in the way people do everything from watch television to listen to music. Robbie Bach, president of Microsoft's entertainment and devices division, said that's a change that plays to Microsoft's strengths.

Still, Microsoft has yet to figure out how to make a lot of money at this new game.

Entertainment ventures losing money
While it has earned a following with the Xbox console and its online gameplay service, Xbox Live, the effort is still losing money. It could also take four years or more before the Zune effort is profitable. Overall, Microsoft's entertainment and devices division lost $96 million in the quarter ended Sept. 30.

The Zune launch also follows on the heels of another Microsoft-backed digital music effort, called PlaysForSure.

In an interview Monday, Chief Executive Steve Ballmer said Microsoft will continue to support the companies that make PlaysForSure devices and services. But he said the company decided to also launch its own Zune product, which isn't compatible with PlaysForSure, after seeing that that effort wasn't doing much to temper Apple's momentum.

"We said, if we just keep on our current model, it's unclear that we're going to expand our footprint in these portable devices," Ballmer said.

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