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Monday, August 28, 2006

Microsoft And Apple: The Empire Bits Back

Stocks: (AAPL)(MSFT)

The management of Microsoft must feel worse with each passing say. They are, after all, the world’s largest software company, founded by the world’s richest man and most famous business figure. A company with shares that traded at next to nothing in the 1980s only to make it all the way to $60 in early 2000. Then, the bloom went off the rose, and the shares have been fairly flat between $22 and $30 for the last four years. No matter what the big software company does, including upping the dividend, getting into video games, or having one of the world’s largest only properties has made much difference for shareholders.

And, of course, the have had to watch the resurrection of Apple, which Microsoft and almost everyone else had left for roadkill. In 1997 and 1998, while MSFT’s stock was moving sharply up, Apple’s stock fell to around $5, after trading near $20 in 1992. Apple’s stock moved to near $20 in 2000, only to drop to close to $10 in 1991. And it stayed there to 2004.

Then, Apple introduced the Lazarus called iPod. On the back of one product, Apple’s stock moved from well below $20 in 2004 to over $86 earlier this year.

Despites stock options scandals, burning computer battery recalls, and doubt about whether iPod sales will keep their fantastic pace, Apple still holds close to $70.

Microsoft has spent the last few months trying to convince Wall St that it can be the real deal again. It can innovate. It can grow. It can do things other than live off its operating systems and start divisions with silly business plans that do nothing but make money.

Toshiba, which will build the new Microsoft Zune multimedia player, unwrapped the product last week. If Zune succeeds in taking big share form the iPod and iTunes, Microsoft can boast that it is still a “player”. If not, it becomes another visible also-ran like MSN.

According to EETimes, Toshiba filed the plans for the new player with the FCC for approval. The Zune is a mixture of weird features and potential iPod killers. Which feature will make the thing sell is still open to guessing.

The Zune has an FM tuner. It is hard to say why. Maybe Microsoft believes that people will start to listen to the radio like they did in the 1970s and 1980s. Maybe they think the feature will compete with portable satellite radio players. It’s hard to tell.

The Zune does have an 802.11 WiFi connection, and that is very important. The FCC filing says that the Zune will be able to share photos, songs and albums with up to four other devices. And, it is built in. No attachments or new gear has to be added to make it work. That will be important. It may be the Achille’s heel of the iPod. The Zune also has a 30-gigabit hard drive which is pretty impressive.

Microsoft is likely to spend hundreds of millions of dollars making the Zune, marketing it, and building a store of music to supply the device.

The large investment, plus the wireless feature, may actually put a dent in iPod. If so, it could turn the tables for both stocks.

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

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