WinInfo Daily UPDATE--Microsoft Revamps Music Strategy--June 14, 2005

Microsoft Revamps Music Strategy to Compete with Apple 

Stung by a series of defeats at the hands of Apple Computer's iTunes and iPod products, Microsoft is revamping its digital music strategy in a bid to regain lost momentum. WinInfo Daily UPDATE readers already know about the first phase of this new battle. As I exclusively reported on May 27, Microsoft now plans to ship a public beta of Windows Media Player (WMP) 11, code named Polaris, and originally scheduled for inclusion in Longhorn in November 2005. Phase two, according to recent reports, is an MSN Music subscription service. And phase three, according to a report this week in The Wall Street Journal, is new leadership Microsoft has brought over Xbox maven Robbie Bach senior vice president of the company's Home & Entertainment Division to run the music business.

These developments point to an all out war with Apple Microsoft has watched silently as Apple pioneered and eventually dominated the online music business first with the iPod portable MP3 player then with the world's first viable online music store. To date, Apple has eschewed the subscription service model that most analysts say will one day dominate the market, but no matter! Apple controls 82 percent of the online music store market and has sold more than 430 million songs. The company also controls 76 percent of the market for portable digital music players and has sold more than 16 million iPods. These numbers sound like Microsoft numbers but a much smaller company with no major partners to speak of is posting them.

That last bit of information is particularly astonishing Microsoft has thus far used the same strategy with digital music that it uses in the PC industry it dominates. Create the foundation of an ecosystem of interconnecting services and products, then let its many partners reel in the customers. There's just one problem: Microsoft's PC industry strategy hasn't worked in the digital music market. Apple's go it alone strategy has proven far more successful. Microsoft intends to change that situation. Although the company won't stop plying the ecosystem approach to promote its platform. Microsoft is prepared to stomp all over its partners. The first step is a long planned subscription music service which the company first discussed last summer when it unveiled MSN Music. Like iTunes, today's MSN Music is a traditional a la carte service that offers 99 cent song purchases. In the future, MSN Music will expand to a subscription music service similar to those that Microsoft partners Napster and Yahoo Music offer.

Microsoft also plans to purchase technologies and products that make sense for its revamped digital music product group. The company designed the upcoming Xbox 360 to be a digital hub for PC based digital media content e.g. music, video, photos, live and recorded TV. The Xbox 360 will even integrate with competitors products such as Apple's iPod and Sony's PSP handheld video game system. In addition, like Apple, Microsoft is trying to improve its relationships with cell phone makers which sell hundreds of millions of devices every quarter. As cell phones become more sophisticated, customers expect them to meet a variety of demands such as playing back digital music and letting customers purchase songs over the air. Both Apple and Microsoft hope to own a piece of the cell phone market but Microsoft already has the technology available to make it happen. Maybe this time Microsoft won't lose out to Apple yet again.

Microsoft's tenacious competitive style could eventually wear on Apple's dominant digital music market position. But Apple is sitting pretty at least for now. This year, the company's digital music offerings are set to outpace sales of its computer products for the first time and Microsoft and its ilk are still a distant number two at best. Nothing suggests that customers are interested in abandoning Apple's simple elegant products regardless of Microsoft's plans. If history is any guide, Apple has nothing to fear at least not for the next few years.