Zune struggles to find the right pitch

After a decent freshman year, the Zune appears to be having a bit of a sophomore slump.

In its first year on the market, Microsoft shipped 1.2 million Zunes, reaching about 3 percent of the U.S. market for MP3 players by the first quarter of 2007. A year later, the company's market share stands at about 4 percent, but that slight gain comes as Microsoft has expanded from one hard-drive model into a family of products that includes both flash-based and hard drive-based units.

As part of its announcement of a Zune video store this week, Microsoft noted that it has now sold more than 2 million Zunes. That would appear to show that business is not growing much despite the expansion of the product line. (And, to get a sense of where the competition is, Apple sold more than 10 million iPods in just the non-holiday January to March quarter).

For their part, Microsoft Zune officials say they're pleased with where things stand, reiterating that they see their effort to form a serious rival to the iPod as a years-long project.

Jason Reindorp, director of product marketing, said the company has shipped roughly a million devices since the second-generation models debuted in December.

"I'd actually say that's pretty good," Reindorp said. The company said it feels it has succeeded in its goal of being seen as a credible alternative for those who don't want an iPod.

"The strategy has been really focused on getting in the game," he said.

The company has been criticized for being slow, though, to match Apple features, taking more than a year to start selling video despite the fact that its initial model came with a large color screen and video playback abilities.

Microsoft also misjudged initial demand for the flash-based Zune last year. In gearing up for the holiday season, Microsoft assumed demand would be highest for those models, and boosted production of those at the expense of the hard drive-based models. Demand turned out to be higher for the 80GB hard drive model, which ended up being in short supply.

Reindorp said that demand has evened out some in the ensuing months, although Zune still has a far higher share of the hard drive-based MP3 market than it does in either the flash-based or overall market.

Much of Microsoft's effort, Reindorp said, has been around building the service connected to the Zune, particularly its social elements. In addition to the video store launched Tuesday, Microsoft also added new social capabilities, such as the ability to share with friends an electronic "Zune Card" that allows them to access playlists of your favorite and most recently listened to music. Those who take part in Microsoft's subscription service gain access to the songs themselves, as well.

Gartner analyst Mike McGuire said although the social aspect to the Zune is a good idea, it also complicates life for Microsoft, which not only needs to try and match Apple on the hardware and software fronts, but also to compete with other social music services such as Imeem and Last.fm.

"Zune's trying to be all of these in one place," he said. "I think it's a tougher sell with Zune."

Of course, Microsoft is plugging ahead with plans to expand the service as well as the number of devices that can connect to it.

"This fall, expect to see a new wave of devices," Reindorp said, noting that the company has established a pattern of updating the Zune software in the spring and introducing new hardware in the fall.

But Reindorp said Microsoft thinks of the dedicated portable player as just one of many "tuners" that could potentially connect to the Zune service. The company is looking at how desktop software, online services, other portable devices, and even cars might be able to connect into the Zune service.

"We've said all along that, being a software company, we are much more focused on the experiences we can bring to life through the software," Reindorp said.

One area in which the company is looking to make changes is its subscription service, known as Zune Pass. Today, consumers pay $15 a month to access an unlimited number of music tracks, though all of those songs expire if consumers stop their subscription.

"We believe today the Zune Pass model is pretty darn good, but it could be better."

Asked whether Microsoft is locked to the notion of being the only maker of Zune hardware, Reindorp said the company would consider allowing others.

"It's an interesting idea to explore," he said. "It's something the company has tried in the past and we had some successes and some failures."