Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Monday, July 24, 2006

Microsoft’s Multimedia Device Will Hurt The iPod

Stocks: (SNE)(AAPL)(TWX)(SNE)

When Microsoft launched the Xbox, there was a great deal of skepticism about whether the device would compete with the Sony Playstation, which had a clear head start. Those days are behind Microsoft now. The company shipped 1.8 million devices last quarter and now has an installed base of about 5 million units. Microsoft’s comments on the financial status of the Xbox division of the company indicated that it still loses money. Microsoft is willing to bleed to get into a strategic market.

The managements at Sony and Nintendo should be even more concerned about Microsoft’s forecasts for its gaming platform. By the ends of its 2007 fiscal year in June of next year, the company forecasts that its installed base for Xbox will be 15 million units. According to NPD Funworld, Xbox Live sold 277,000 units to Playstation 2’s 312,000.

Moving to the “iPod killer” that Microsoft intends to release late this calendar year, the device is rumored to be able to connect to the internet via WiFi, a distinct advantage over the iPod, which has to be connected to a PC by wire. The device, code named Zune, will probably play music as well as video. The most outrageous claim about the business model for the device is that “Microsoft is going to offer to buy-out users’ collections of iTunes and replace the files with Zune-compatible files”, according to the TalkXbox website. As wild as the offer sounds, it may be true, even though Microsoft may have to spend tens of millions of dollars in license fees to music companies to underwrite it.

Microsoft has a secret weapon that has not been mentioned in press accounts of the launch of the new device. It’s the Windows Media Player, the most widely distributed multimedia device in the world. Although Windows Media is the piece of software that has gotten Microsoft in trouble with the European Union and other countries because it is bundled with Windows, it is still the multimedia player of choice on PCs. It is also seen more and more frequently on mobile devices like cell phones and PDAs.

Anyone who underestimates the huge number of music and video files in the Window Media format is missing the critical point behind the adoption of Microsoft’s new hardware multimedia player. Consumers already have hundreds of million, if not billions, of file in Windows Media Players on their PCs. Movielink and CinemaNow, two of the largest online movie sites, use Windows Media. So does the multimedia operation at AOL, MSN and Yahoo!. Thousands of websites use Windows Media for its superior audio, video and the digital rights software that allows content companies to protect their content from piracy. The digital rights protection that Microsoft has built is considered the best in the world.

Microsoft will probably build an easy to use product that is priced to drive unit sales. The wireless capability is likely to be a strong selling point. If people can get access to music and movies free if they transfer their iPod sales, it will certainly hurt Apple. The idea that Microsoft will underwrite this is not unusual when investors look at the cost of the Xbox launch and what the company was willing to pay to drive market share. But, the last arrow in the quiver, and the most powerful one, is the amount of content already available in the Windows Media format. It is a pool of music and video that cannot be matched by any other company in the world.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

Powered by Blogger