Microsoft will start selling a wireless digital music and video player to compete with Apple’s iPod by Christmas, sources close to the matter reported.
Microsoft’s interest in making its own hand-held music and video player, to challenge Apple Computer’s iPod and expects to have it in stores in time for the holiday season, disclosed by entertainment industry executives lately, indicates that its old way of doing things is not working in its battle against Apple Computer’s iPod.
The new player, which Microsoft Corp. 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.
In the PC market, its bread and butter, Microsoft has depended on hundreds of large and small computer makers that have built desktop and laptop computers running its Windows operating system.
But in some areas, Microsoft has been moving toward a go-it-alone strategy. The models here are Apple Computer’s Macintosh and iPod businesses, which combine hardware, software and online services in a user-friendly package.
Microsoft Corp. has also been showing a new media software, developing an application akin to Apple Computer Inc.’s iPod/iTunes integrated ecosystem, according to another source. Microsoft’s digital device would be equipped with at least one feature the iPod lacks: wireless Internet capability that would allow users to download music without being connected to a PC.
Microsoft’s device, which is similar to an existing player that uses the company’s software, would also have a more advanced video screen, according to the executives, who did not want to be identified because they were not authorized to discuss the device.
The company has also held negotiations, the executives said, with major record companies and some major television networks in order to settle on terms that would allow it to sell music and video content online through a service similar to Apple’s iTunes Music Store.
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 are proposing an iTunes model approach," the first source told Reuters. "They are 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.
Microsoft competes against Nintendo and Sony with its Xbox video game console; it designed the Xbox computer chips with I.B.M. and tightly controls software distribution. And in the market for cell phone handsets, three of the four major carriers now offer phones labeled with the Microsoft Pocket PC and Smart Phone brands.
The Xbox video game console, Microsoft’s strongest move into consumer electronics, uses software that does not run on any other player.
The shift, analysts said, is being driven by Microsoft’s need to grab a share of markets that could grow more quickly than the PC industry, which is maturing.
"Digital media is too important to abdicate the market to Apple," said Phil Leigh, president of Inside Digital Media, a market research firm in Tampa, Fla.
The portable player would represent Microsoft’s most ambitious effort yet to compete with the iPod, which has generated billions of dollars in sales and turned Apple into the dominant retailer of digital players and music.
Until now, Microsoft has largely bet that hardware manufacturers like Samsung could come up with a device that would use Microsoft’s software and cut into Apple’s lead. But the company’s plans to develop its own device are an indication that it may no longer be satisfied with that strategy.
"If this is true, then this is them trying to take more control over the situation," said Mike McGuire, vice president for research on mobile devices at Gartner, which tracks the electronics market. "In effect, they are basically saying, ‘we think we can do something better’" than the existing hardware makers.
The shift is likely to anger Samsung, Sony, Creative Technology and other manufacturers that were persuaded to use Microsoft’s software in their devices, because a Microsoft player would compete with theirs.
Entertainment industry executives who were briefed on the Microsoft music and video player said this week that the device was equipped with a wireless Internet connection and an advanced display screen, and that the company planned to release it before the holiday season, along with an online store.
Richard Doherty, president of Envisioneering, a consumer electronics consulting firm based in Seaford, N.Y., said he had talked to several major retailers of consumer electronics in recent weeks and that Microsoft had not yet briefed them on its plans, leaving open the possibility that the company had not made a final decision to introduce its own player.
But one music industry executive said his company was told that Microsoft had made a large financial commitment to market a player this year. A senior TV network executive said that Microsoft had talked to the networks about selling their programming through the online store, but that "no deals are in place."
But the executive said that the networks would welcome competition for Apple in downloads. Music industry executives in particular have complained about Apple’s control over the digital music market and its power to determine pricing of songs and albums.
A Microsoft spokesman, Mark Murray, would not comment on the company’s plans.
Introducing a player would be a distinct gamble, analysts said, fueled by the company’s inability to make a dent in Apple’s domination of the digital audio market with its combination of the iPod and the iTunes Music Store.
One major risk is that makers of digital music players that now use Microsoft software might feel that they faced a disadvantage if Microsoft’s player were more directly integrated with a Microsoft music service and offered exclusive features.
The company’s major hardware partners, including iRiver Inc., Creative Technology Ltd. and Samsung, might break with Microsoft and team up with a competitor like RealNetworks Inc., the music and video service provider, making Microsoft’s task all the more difficult.
"These guys put an awful lot of sweat into making the hardware right," Mr. Doherty said. The partners could see a competing player from Microsoft "as a bit of a betrayal," he said.
Nevertheless, Microsoft may have decided that it has no alternative in the face of its inability to break Apple’s strong hold while using the old PC industry model.
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 X-Box 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.
Music and video may be so crucial to how computers are used in the future — a potentially big source of new growth in software and hardware sales — that Microsoft cannot strategically afford to let Apple continue to hold the upper hand.
If Microsoft does decide to challenge the iPod directly, it may try to gain an advantage by creating a player that matches Apple’s ease of use but, unlike current iPod models, is not dependent on a personal computer.
A person who works closely with one of the music labels said that the Microsoft device would permit users to play songs wirelessly from other Microsoft players in the vicinity. Users could "tag" music that looked interesting and then play it one or more times without paying for it, this person said, adding that the exact terms of the music rights had yet to be worked out.
A consumer electronics software developer said another feature that may make the device easier to use is at the heart of Microsoft’s recently released Windows Media Player 11 software: a highly compressed database of song information with pointers to millions of tracks stored online. This database on a wireless portable player could make it much easier to search for new music.
A device that plays video would most likely require a hard drive for storage. The technological risk is that Microsoft would be entering the market with a relatively bulky device, just when Apple has been moving to slim music players with flash memory like the Nano that are more durable and have longer battery life.
Today, almost all media players must be connected to a PC to transfer files. But several start-up firms, including Music Gremlin and Zing, are now offering or developing services that are built around players with wireless capabilities.
Mr. Leigh of Inside Digital Media said Microsoft’s shift reflected its impatience with the PC model. "From Microsoft’s point of view, they have waited long enough," he said. "The rest of the Microsoft ecosystem has not done the job. If the Microsoft ecosystem cannot compete effectively with Apple, it is a real problem for Microsoft."
Apple is reported to have a wireless version of the iPod waiting in the wings, and it is also said to be close to introducing a version with a touch screen. Those bits of consumer polish might outshine Microsoft just as it was entering the business with its own hardware.
"The success of Apple is that they have 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 had a similar approach. They owned content, devices, software and an online store and it has not enjoyed nearly the success Apple has, he said. It is also about how you execute the plan.
According to one product designer — who has close ties to several consumer electronics manufacturers and insisted on anonymity because of his business relationship with one of those companies — at least one of the leading makers of digital audio players has already approached Microsoft to ask it to clarify its strategy.
A spokeswoman for Samsung said the firm would not comment on the Microsoft media player reports. Creative Labs and iRiver executives did not return phone calls.