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Zune Launching In 30,000 Outlets

11/13/2006 04:00:00 PM Eastern

New York – Microsoft’s video-capable MP3 player launches Tuesday in 30,000 outlets, likely capturing share from high-end makers of Microsoft PlaysFor Sure-certified MP3 players without cutting into Apple’s share, some analysts said.

Expected Microsoft advertising and promotion, however, will likely raise consumer interest, contributing to an acceleration of MP3 player and portable media player (PMP) sales during the Christmas selling season.

For Microsoft in particular, however, the broad distribution of the $249 Zune and the company’s expected promotion won’t do much more than “go a long way toward consolidating the high end of the non-iPod market over time and take a significant portion of share from high-end suppliers like a Creative,” said Gartner analyst Van Baker.

Baker cited Zune’s lack of differentiating features, other than peer-to-peer song sharing via Wi-Fi and its status as a “non-iPod.”The lack of authorized video downloads will also reduce its appeal at launch. He also described Microsoft’s overly broad launch distribution as a marketing misstep because it will “diminish the level of excitement that any store will have” in selling a product that lacks a level of exclusivity. Microsoft’s long-term interests would have been better serviced by launching with fewer outlets and ramping up to broad distribution, he said.

Retailers participating in the launch read like a who’s who of consumer electronics retailing and include Best Buy, Circuit City, Costco, Wal-Mart, Target, Staples, Office Max, Office Depot, Toys R Us, Meijer, Amazon, EB Games, GameStop, Sears, Kmart, Fry’s, Transworld, Meijer, Nebraska Furniture Mart, Brookstone, Sharper Image, Car Toys, and J&R Computer World.

The product and a slate of accessories will also be available through distributors, including D&H Distributing, to regional retailers and smaller accounts, but some of these retailers are shunning the Zune, citing margins of 9 to 17 points. Although iPods also lack margin, a Northeast retailer said, his company carries it anyway to make margins on iPod accessories. “With the iPod, you have an installed base of millions of units, so you can make money on the accessories,” the retailer said, “but there’s no installed base for Zune yet, so why carry it?”

Tom Galanis, Sixth Avenue merchandising VP, commented, “Few consumer electronics retailers are going to take a chance to promote it with their money and devote floor space to it when the margins are 9 percent.”

One retailer, however, said he received ad money from Microsoft that more than offset the 3 points that he pays to a distributor.

Zune’s long-term appeal could rise if Microsoft, as expected, expands its selection of Zune models to include more volume-oriented price points, including the $199 price of the Apple 4GB nano, said Gartner’s Baker.

The potential exists for Microsoft to garner a large share of the closed-system portable MP3/PMP market, according to ABI Research, because many prospective MP3 player buyers — even current iPod owners – will consider Microsoft's Zune. “Our conclusion,” said analyst Steve Wilson, “is that iPod users don't display the same passionate loyalty to iPods that Macintosh users have historically shown for their Apple products.”

ABI asked 1,725 teenage and adults in the U.S. about their plans to buy an MP3 player in the next 12 months, and of respondents who said they were likely to do so, 58 percent of those identifying themselves as existing iPod owners, and 59 percent of other-brand owners, would be “somewhat likely” or “extremely likely” to choose Zune over an iPod or another brand of MP3 player. Only 15 percent of iPod owners said they were “not very likely” or “not at all likely” to choose Zune. Peer-to-peer sharing “isn't all that compelling, at least not now,” Wilson noted. “There's a lot more you could do with that capability.

For his part, Forrester Research analyst Ted Schadler said Zune doesn’t seem “disruptive enough” to take major market share.

Zune, however, has appealed to major retailers, including Target, which devoted the front page of its Sunday circular to the Zune. Best Buy devoted less space to the player and its accessories on an inside circular page, having promoted its own download store and tightly integrated San Disk-made player on the front cover of an early October circular.

For its part, Sears devoted almost an entire page of its Sunday circular to the Zune. Staples plans to promote the device on the front page of its holiday circulars and will “heavily market through other vehicles,” including radio and in-store kiosks that it will “definitely be setting up,” a spokeswoman said.

Likewise, J&R Music World in New York City has set up Zune kiosks in its store and is running print and Internet advertising. Fellow New York retailer Datavision has been taking preorders since Halloween and described preorders as “doing a little better than okay.”

At Best Buy, Zune will appear alongside the chain’s other MP3 players in an MP3 player display where each brand gets its own space, a spokesman said. An extensive selection of Zune accessories is appearing in the MP3 accessories area, he added.

CircuitCity has rolled out Zune to all its stores and its on-line store and expects it to “be a good seller for the holidays,” a spokesman said. It devoted almost the entire page of an inside page to Zune in its recent Sunday circular.

Wal-Mart said it “anticipates great customer reaction to Microsoft's latest offering” and hosted a reggae concert at a park in SouthBeach, Miami on Monday. Microsoft also hosted three concerts on Monday to launch the product, including one in Seattle with the Red Hot Chili Peppers. The other concerts were in New York City and Los Angeles.

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