Pushing Zune: Is Microsoft fighting an uphill battle?

When Microsoft on September 15 launched its next-generation Zune HD media player, the software giant billed the device as “a significant step forward,” touting its ability to play high-definition (HD) video and receive HD radio signals, along with a state-of-the-art, organic light-emitting diode (OLED) screen.

Experts at Wharton say that the Zune HD will need to be a big step forward in the eyes of consumers, because it faces the nearly impossible task of competing against Apple and its iPod player.

“The iPod is clearly the leader,” says Lawrence Hrebiniak, a management professor at Wharton. “The iPod has become the generic name for this type of product, like Xerox and Kleenex [became for their product categories].”

Microsoft’s Zune line of music and video players debuted in 2006, but it has failed to capture significant market share.

According to research firm NPD Group, Apple’s iPod had 73 per cent of the market as of July 2009. Milpitas, Calif.-based SanDisk had nine per cent of the market, followed by Sony at three per cent.

Microsoft trailed with two per cent. Peter Fader, a marketing professor at Wharton, says that Microsoft’s Zune HD has no chance against Apple.

“The Zune does a lot of marginal things well, like digital radio, but none of them is enough to get a consumer to say, ‘Hey, I’ll buy that thing,’” Fader notes. “The Zune HD is absolutely doomed to fail, and I don’t think Microsoft should continue to push in this direction.”

Other experts at Wharton stopped short of saying Microsoft should give up on the Zune, but they question whether the company is wasting resources by chasing the iPod juggernaut, which Apple refreshed earlier this month by adding a video camera to the popular iPod Nano.

Meanwhile, Microsoft has cut the Zune lineup to one model, the Zune HD.

The company previously offered Zunes at multiple price points and configurations.

“Microsoft has to ask whether the Zune is strategically important,” Hrebiniak says.

Microsoft, however, is likely to continue with the Zune experiment, largely because it is showing improvement with the device —at least from a product perspective, say experts at Wharton.

The Zune product evolution follows Microsoft’s usual playbook: Start out with a so-so device and improve each generation. What’s unclear is whether the new HD features will be enough to help the device gain traction.

“Somewhere in there is a business strategy for the Zune,” says Kendall Whitehouse, director of new media at Wharton. “Microsoft will try and try again and throw money at it until they get somewhere.”

Positive reviews

Indeed, the Zune HD has received positive reviews from the technology press and it has features that the iPod doesn’t.

For instance, Microsoft has bet on high-definition video to differentiate the device.

The Zune HD is among the first handhelds able to play high-definition video and receive digital HD Radio signals.

Apple’s iTunes software supports high-definition video, but only when displayed on Apple TV (a set-top box) and on PCs.

The Zune HD’s OLED screen is more vibrant than typical touch displays— a potential selling point for tech-savvy consumers looking for state-of-the art features.

Microsoft has also differentiated its Zune line with a subscription service called Zune Pass.

For $14.99 a month, Zune Pass subscribers have unlimited streaming access to six million songs in the Zune Marketplace and are allowed to permanently download 10 songs a month.

(Apple’s iTunes store allows listeners to hear samples of music, but they must pay for each download.)

Microsoft executives acknowledge that the Zune is a work in progress.

“We [are continuing] to expand the brand presence for Zune and ... to build our capability in the music and video delivery marketplace,” said Robbie Bach, president of Microsoft’s entertainment and devices division at a July 30 financial analyst meeting.

However, Microsoft is going to need more than new features to boost the Zune’s presence.

Saikat Chaudhuri, a Wharton management professor, notes that other competitors are likely to follow Microsoft’s HD lead relatively quickly.

The company will need savvy marketing and strategic positioning for the Zune HD to be a contender. The biggest challenge, he says, is out-marketing Apple.

“Apple made the iPod a fashion item. The problem is that Microsoft doesn’t have a fashion-oriented approach to marketing. Microsoft is very functional [in its approach], but somehow it has to tap into fashion sense.”

Free advice

Solving the Zune HD marketing conundrum isn’t easy. According to Fader, the Zune moniker has been tainted by Microsoft’s consistent failure to gain traction with the device.

Microsoft originally launched the Zune with a series of taglines such as “Music the way it wants to be” and “Welcome to the social.”

That initial Microsoft marketing effort was “muddled” and never really resonated with its target audience, Fader points out.

Market share for the Zune topped 10 per cent in late 2006, when it was introduced, according to NPD, but it has gone downhill since.

In May 2008, Microsoft said that it had sold two million Zune players, but then retailer GameStop announced it was going to stop carrying the device due to insufficient demand.

In contrast, Apple on September 9 (when it announced its video-enhanced iPod Nano) said that it has sold 220 million iPods to date.

Given Apple’s lead, Fader says that Microsoft’s best move with the Zune would be to scrap the name and start over, much like it did with Bing, its rebranded search engine.

“First, don’t call it a Zune. A ‘Zune’ is just a misconceived mess.... Start with a clean slate.”

According to Wharton marketing professor Jerry Wind, Microsoft has to “design a strategy that centers around the Zune HD’s key benefits over the iPod.”

Those benefits appear to be the ability to play high-definition video and capture HD Radio signals, the next-generation technology for broadcasting.

The problem? Microsoft isn’t competing against just the iPod as much as it is against an entire ecosystem of applications and developers that go along with Apple’s device.

The number of applications available for the Zune HD pales by comparison with those available for the iPod through Apple’s App Store: The Zune HD currently has nine free applications available, while Apple has 85,000 applications available on its App Store for the iPod and iPhone.

“Apple’s success is a combination of multiple factors,” says Wind. “Microsoft could go after a niche, but it has to answer the key question: Why should anyone use a Zune HD?”

Wharton marketing professor Eric Bradlow agrees that Microsoft will likely have to adopt a niche approach, given its lack of market share.

It will need to position the Zune as strong in one area—say, as a player focused on music and video — and then make consumers advocates for the product.

Conversely, Microsoft could push the Zune HD as one device that can do multiple things.

“Microsoft has huge brand equity to leverage and [it has] large mindshare,” Bradlow notes. “The Zune HD needs to generate enough buzz to attract feature-savvy and high word-of-mouth people.”

Attracting those consumers may require drastic tactics, like giving the Zune HD away at a low price or even free just to get consumers to try it, says Wind. Another option would be to bundle the Zune with the Xbox, Microsoft’s popular game console.