Opinion: The high stakes behind Microsoft's 'iPod killer'

Push into media devices is part of a broader battle with Apple

Widespread reports claim  Microsoft will release a digital media player to compete against Apple's iPod. The stories received the lightest of denials from Microsoft, which said only the obvious: The reports  are speculation and rumors.

While most reports positioned this development as the start of competition between Microsoft and Apple in the audio player space, the two companies already are, in fact, competing bitterly -- if quietly. And the stakes are potentially huge, extending well beyond music players and music download services.

"Microsoft is not interested in entering the digital audio player market per se," noted Ross Rubin, director of industry analysis for market research firm NPD Group.  "It's all part of a broader battle."

Apple's wildly popular iPod is, by far, the leading media player, with market share still above 76%, NPD recently reported. The iPod, along with the iTunes music service, has played a pivotal role in increasing Apple's profits and some analysts give the glow created by these products credit for Apple's recent modest increase in desktop market share.

However, Microsoft developed the digital rights management (DRM) software, which it dubbed PlaysForSure, that is behind the subscription music services offered by vendors such as Rhapsody, Napster, Virgin Digital and Yahoo.  These services, which compete directly against iTunes, enable users to pay a flat monthly rate -- typically between $10 and $15 -- to download virtually all the music they want for playback on their PCs and audio players. Subscribers can play that music as long as they pay the monthly fee.   This option to "rent" music isn't offered by iTunes, which requires users to purchase the music for 99 cents a song or ten bucks an album. 

Perhaps not surprisingly, iPods don't work with PlaysForSure subscription services; using those services requires a media player from vendors such as SanDisk, Creative, iRiver and Archos. And those PlaysForSure devices don't work with iTunes.

However, audio players and music services are just one part of the competition between Microsoft and Apple. Microsoft wants to be the dominant platform provider for mobile communications devices and gadgets such as MP3 players, just as it is with desktop and laptop computers and servers. In addition, it wants Windows PCs and dedicated Windows-powered devices such as media servers and set-top boxes to control the flow of music, video, still images and other media throughout the home. For the last few years, that desire has been on clear display at trade gatherings such as the Consumer Electronics Show held each January in Las Vegas, where Microsoft devotes a huge amount of booth space to these devices and capabilities.

However, as was the case more than 20 years ago with the introduction of the Macintosh, Apple is standing in Microsoft's way.

Rubin said Microsoft has a heavy investment in consumers areas such as mobile phones, audio and video. "Those platforms are very important for Apple as well," he noted.  And, at this point, Microsoft does not have a clear lead over Apple.

In fact, Microsoft has struggled mightily -- and has had only limited success so far -- as a platform provider for communications devices and consumer gadgets, markets that are expected to grow rapidly for years to come.  For instance, when it comes to smartphones, Symbian, which is co-owned by cell phone vendors including Nokia and Sony Ericsson, has a huge worldwide lead over Microsoft.  With the venerable Palm OS being ported to Linux, that platform, too, is expected to surge.  

Some rumors have Apple developing cell phones with iPod-like capabilities, presumably based on some version of the Apple OS.  In addition, other rumors have Apple developing a computer to control media flowing over home networks. In other words, iPod and iTunes can be seen as Apple's foot in the door in the consumer home and gadget markets that Microsoft covets.  Media players and music services, then, are just an early, although important, skirmish in that battle.

Another problem for Microsoft is that the PlaysForSure subscription music services have yet to become widely popular. One reason for that is that iPod's massive success; iPod owners would have to buy new devices to use the subscription services.  And, to be blunt, I've looked at many, if not most, of the non-iPod devices available and they simply are not as sexy as iPods, which have exquisite design and usability, not to mention extremely positive word-of-mouth.

"Microsoft is looking to provide a reference product that would stimulate the market," Rubin noted.

A compelling Microsoft device for subscription music services could be a big boon for those services and for Microsoft's aspirations in the gadget and home markets.  Seen in this light, a Microsoft media player would be a tactic in a larger battle, not a broad strategy. After all, as Rubin noted, Microsoft's primary need isn't to create a best-selling media player, but to stop Apple.  

Microsoft has never shown much skill at selling consumer hardware, with the possible exception of its XBox game console, although Rubin pointed out that Apple had no experience selling music gadgets before iPod.  And Apple could short-circuit Microsoft by adding a subscription component to iTunes; Steve Jobs has acknowledged that such a move may one day become necessary.

But with stakes this high, Microsoft is likely open to trying virtually any tactic.  And as many competitors -- including Apple -- have learned in the past, it's not wise to underestimate Microsoft when it wants to gain control of a market segment.

David Haskin is a freelance writer specializing in mobile and wireless issues.

Copyright © 2006 IDG Communications, Inc.

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