Microsoft Confirms It's Planning Challenger to iPod

SEATTLE – Microsoft Corp. (MSFT) said on Friday it plans to release a new music and entertainment player and accompanying software under the "Zune" brand this year, in a belated attempt to challenge the dominance of Apple Computer Inc.'s (AAPL) iPod player.

The announcement comes after weeks of rumors and speculation about such an offering. Microsoft has already touted the products to record companies.

"Under the Zune brand, we will deliver a family of hardware and software products, the first of which will be available this year," said Chris Stephenson, general manager of market for entertainment and services at Microsoft, in an statement. "We see a great opportunity to bring together technology and community to allow consumers to explore and discover music together."

The world's largest software maker faces an uphill climb in closing the gap on Apple's iPod media player and iTunes Music Store, the runaway leaders in their respective areas.

The iPod holds more than half of the digital media player market, according to research company NPD, while iTunes accounts for over 70 percent of U.S. digital music sales.

In the United States, the iPod has more than 75 percent of the digital music player market, according to NPD.

"Creating a lifestyle device, Microsoft is clearly going to face a battle here," said Michael Gartenberg, research director at JupiterResearch. "It's going to be hard for them to create the same level of cachet that Apple has with the iPod."

Music-industry sources told Reuters earlier this month that Microsoft disclosed plans to be in the market before Christmas with a media player that will allow users to download videos and music wirelessly.

It will also try to replicate Apple's simple approach to providing an integrated, seamless ecosystem for digital media, seen as the key to its success with iPod/iTunes, the sources said.

"What Apple has done really successfully is they've controlled all the elements of the solution," said Gartner analyst Mike McGuire. "But having all of those elements does not guarantee success — just look at Sony."

Sony Corp.(SNE) introduced a music service as well as its own software and player, which has to date failed to dent Apple's share of online music sales or sales of the iPod.

Microsoft did not disclose pricing for the new media player or whether it would be willing to take losses on the hardware to make money from the sale of music, video and possibly games. This is the strategy it adopted with the Xbox game console.

"The iPod is going to be a tough nut to crack, but you probably could have said the same thing with Sony and the PlayStation, and [Microsoft] has done a good job positioning the Xbox," said Toan Tran, analyst at Morningstar.

Microsoft sources said Robbie Bach, president of Microsoft's entertainment and devices division, is working with J Allard, vice president of its Xbox team, on the digital media player/software project.

Allard's involvement is seen as significant, because he is one of the few executives at Microsoft with experience in launching a consumer electronic device from scratch. His involvement suggests that gaming might be part of the media player.

Analysts also said Microsoft will be very aggressive marketing the product, as it was with the Xbox.

"It definitely is a big bet," said Morningstar's Tran. "Microsoft definitely has its work cut out for it, but the company has massive financial resources, and it's very persistent."