Forget Zune phone, we're aiming for Zune (on) TVs, says Microsoft

Computerworld - Rather than building a Zune-branded smartphone, Microsoft Corp. plans to take the software and online store it built for its Zune media player and bring them to your television set in the hopes of emulating Apple Inc.'s phenomenally successful iTunes Store. But it still plans to deviate from iTunes in strategy.

The store, called the Zune Marketplace, offers millions of songs, podcasts, music videos and TV shows for purchase and download. It's accessible to Zune users as well those who've downloaded the software onto their Windows PCs.

That hasn't been enough for critical mass, judging by the $85 million Microsoft reaped from sales of Zune hardware and music and video downloads during the Christmas quarter. By comparison, the iTunes Store cleared about $3.5 billion last year, according to Apple's filings with the U.S. Securities and Exchange Commission.

The Zune Marketplace remains outgunned because the Zune has made little progress against the iPod's dominance. Only 2 million Zunes had been sold as of May 2008, the last time Microsoft publicly announced figures.

Meanwhile, nearly 200 million iPods have been sold, along with almost 18 million iPhones.

Still, Microsoft hopes it can unshackle the Zune Marketplace and mount a more serious challenge to the iTunes Store.

Instead of building its own Zune phone, Microsoft is bringing the Zune Marketplace to the upcoming 6.5 version of the Windows Mobile operating system.

Microsoft is "bringing our Zune Service, not the Zune hardware but the Zune entertainment service, to all three screens -- PC, phone and TV," CEO Steve Ballmer told Wall Street on Tuesday (download Microsoft Word transcript). "So it becomes a fundamental part of building a real business around TV sets."

Ballmer's words echoed those of Enrique Rodriguez, the Microsoft vice president in charge of the Zune software, who told CNET earlier this month that "Zune the service needs to transcend Zune the device."

Neither executive elaborated. Matt Rosoff, an analyst at independent firm Directions on Microsoft, thinks that Microsoft will bring the Zune Marketplace to its Xbox Live service. The latter already delivers online games and streaming Netflix movies to the 28 million owners worldwide of Xbox 360 consoles.

This would be "a no-brainer that they've been talking about forever," he said.

Meanwhile, Michelle Abraham, an analyst at In-Stat, thinks that Microsoft will integrate the Zune service into its Mediaroom software.

Microsoft sells Mediaroom to cable and telecom operators, who use it to create on-screen menus of available channels, shows and services for TV service subscribers. Though not well known, Mediaroom is used in more than 2 million homes, according to Microsoft.

One potential problem, said Abraham, is that the Zune Marketplace sells TV shows for download. That could conflict with cable operators' efforts to sell shows via Video-on-Demand or Pay-Per-View, or upsell their subscribers to premium subscriptions, she said.

Both agreed that Microsoft is unlikely to build its own television set-top box.

"I think they'd rather sell you an Xbox as a media device and then hope you'll buy at least a few games for it," Rosoff said.

Microsoft is doing other things to push the Zune Marketplace as a video-download destination. Earlier this month, Microsoft announced plans to start producing original shows downloadable for free via the Zune Marketplace. The first will be a comedy series featuring episodes that run between three and five minutes.

Microsoft has no plans to abandon the struggling Zune media player, but may bring out new devices later this year. Coming Zunes may boast improved video, speculates Rosoff, such as the ability to project video onto a screen, something cell phone maker LG has already demonstrated, and which Microsoft Research has also been testing, albeit in larger devices.