Sources: Microsoft's 'iPod Killer' to Hit Stores by Christmas

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Microsoft will start selling a wireless digital music and video player to compete with Apple's iPod by Christmas, sources close to the matter said on Wednesday.

The new player, which Microsoft Corp. (MSFT) has been touting to record companies in the last few weeks, will let users download music and videos over the air, according to one source, a feature which would give it an edge over the iPod.

Microsoft has also been showing a new media software, developing an application akin to Apple Computer Inc.'s (AAPL) iPod/iTunes integrated ecosystem, according to another source.

Record companies are expected to be receiving prototypes to test in the coming weeks, said the first source. The sources said Microsoft will be throwing significant marketing dollars behind the launch.

"They're proposing an iTunes model approach," the first source told Reuters. "They're now interested in controlling the whole vertical stack of technology from the device to the service to the software."

Both Apple's iPod player and iTunes Music Store are runaway leaders in their respective market sectors. The iPod has more than half of the digital media player market, according to research company NPD, while iTunes accounts for over 70 percent of digital music sales in the U.S.

Robbie Bach, appointed president of Microsoft's entertainment and devices division in December, is working with J. Allard, vice president of its Xbox team, on the unnamed digital media player/software project, according to a source close to Microsoft.

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 with the Xbox gaming system.

Analysts believe that for Microsoft to have any chance of competing with Apple in the next year, the software giant will need to have a player and service ready in time for the Christmas season, seen as crucial for the success of any consumer electronics launch.

Apple's simple approach to providing an integrated, seamless ecosystem for digital media is seen as the key to its success with iPod/iTunes.

"The success of Apple is that they've been able to create a very seamless experience, said Mike McGuire, analyst at Gartner Research. "That ability to control the hardware and software has given them an edge."

But McGuire cautioned this was not enough in itself.

"Sony (SNE) had a similar approach. They owned content, devices, software and an online store and it hasn't enjoyed nearly the success Apple has," he said. "It's also about how you execute the plan."

Microsoft declined to comment.