Microsoft Tries New Approach for Failing Zune

The 6th century strategist Sun Tzu famously dictated, "Tactics without strategy is the noise before defeat." Microsoft's corporate bosses, well-thumbed copies of The Art of War in hand, are finally heeding the good general's advice and changing strategy with the new Zune HD, launching today.

After years of fruitlessly pursuing Apple's dominant iPod, Microsoft is repositioning Zune as an online service for a variety of devices. Today's new player is the first in a line of new tactics, including a Zune-branded service to deliver music and movies to the Xbox video game console as well as cell phones and personal computers. Zune "is growing into a comprehensive entertainment service that’s no longer tied to any one screen or device,” says Enrique Rodriguez, corporate vice president of the TV, Video and Music Business at Microsoft.

Sure, the Zune HD has all the bells and whistles of an ambitious iPod-killer. The slick device ships with a 3.3-inch screen, high-definition radio tuner, and the capability to stream movies onto TVs. A $15 per month Zune Pass service lets users stream as many songs as they want. But managers have ditched catching up with Apple as a goal.

And for good cause. According to researcher NPD Group, Zune's market share of MP3 players is a slim 2%, compared to 73% for Apple's idevices. In the company's fiscal fourth quarter, Microsoft's entertainment and devices unit, which includes the Xbox and Zune, saw a 25% drop in revenues, to $1.18 billion. Revenues specifically from Microsoft's "nongaming business" dipped 12% or $292 million "primarily reflecting decreased Zune and PC hardware product revenue," according to an earnings release in late-July.

To make matters worse, on September 9, Apple managed to undercut Microsoft's launch with it's own strategically-timed announcements. Along with a new iPod nano equipped with an ultra-thin video camera, it lowered the price of its entry-level iPod Touch to $199.The Zune HD starts at $220. By transitioning the Zune brand into a platform for delivering all types of media, Microsoft hopes to avoid those crushing comparisons.

Microsoft's plan has advantages. The company's Xbox LIVE internet service has some 20 million users. Conflating Xbox services with Zune services makes sense and should help it build a large audience. That will help in its battles with gaming rivals Sony and Nintendo which have struggled to make inroads delivering movies and other content to their game machines.