Analysts call for Microsoft to drop the Zune

By  |  Thursday, July 30, 2009 at 9:49 pm

Zune GraveyardMarketWatch published a story today that could light a fire under Microsoft’s shareholders: it all but wrote an obituary for the company’s Zune portable media player. However, I do not think that the Zune is on the chopping block–yet.

Sales for the Zune dropped 42% over the last quarter to $211 million, according to Microsoft’s Q4 financial reports. In comparison, Apple iPod sales declined just 11%, for total sales of $1.5 billion, MarketWatch reports.

In terms of market share, the best-case scenario cited in the report was an IDC survey from last fall that found that the Zune holds 4.8% of the market. Recent numbers for the NPD group lower that estimate to a dismal 2%, compared to 70% for the iPod.

Microsoft is expected to ship the Zune HD, a touch screen interface device that offers high-def video output and radio, in the fall. Sales will likely continue to falter until then.

What’s more, the Zune barely registers on Microsoft’s income statement: It only account for 2% of the company’s total sales revenues, the report noted. While Microsoft is still profitable, its Q4 earnings were significantly lower than last year, and investors may not have patience for failed projects that fall outside of its core business.

Indeed, Microsoft may need to face up to reality. An analysts quoted in the MarketWatch report said that many retailers have stopped carrying the device altogether. “If Zune were going to make a strong move against the iPod, it already would have,” IDC analyst Susan Kevorkian told Market Watch. Ouch.

Apple also “outflanked” Microsoft by shifting its customers to higher margin products, such as the iPhone, George Kurian, a vice president at Tradition Capital Management said.

He suggested that Microsoft abandon Zune and purchase Palm’s Pre to compete against Apple in the high-growth smart phone category. Microsoft was rumored to be working on a Zune phone, but is instead working on reference designs that its partners can use to build devices that will be able to access Zune branded services.

What Microsoft’s shareholders think is another story altogether. The company has been widely panned for underperforming against the market over the past decade, and for its failed consumer initiatives.

Despite its performance, it has yet to face a shareholder’s revolt. Investors have been infinitely patient with management’s attempt to diversify Microsoft, and management always gets a lot of leeway (and money) to experiment.

Microsoft will have to eventually justify its Zune business. If the HD does not fly off the shelves when the company opens its stores in the fall, bypassing retailers, patience may finally wear thin. Then it might have to decide whether the Zune is worth the effort.


Read more: , ,

6 Comments For This Post

  1. Romey Says:

    Something that needs to be considered is the rumor that Apple will drop the iPod Classic from their lineup this fall, thus removing the biggest player in the large-media player format.

    Apple can tout the Touch all they want, but they can’t ignore that there is still an audience that wants a large-volume, hard drive-based media player (especially with the continued proliferation of movies and TV shows). If Microsoft can hold onto that form factor, the Zune may appear to be an attractive alternative when Apple can only offer a discontinued product.

  2. AJ Says:


    Well hopefully Microsoft indeed holds on to the large capacity player version, like you suggest.

  3. Ron Says:

    You say Apple’s iPod sales declined 11%, but that figure is not accurate!

    Apple’s iPhone sales increased by much more than that, and the iPhone is Apple’s best iPod. For whatever reason, Apple does not count the iPhone as an iPod, and therefore accounts for them separately.

    Personally, I know of at least 4 people that have bought iPhones to get a new phone and also replace their old iPod. iPod sales will continue to “decline” as long as these two devices are accounted for separately.

    The unfortunate part in that statistic is that Microsoft loves to point out that iPod sales have decreased when in fact they have increased! Eventually the accurate information will come out and Microsoft will look like they’ve been misleading people yet again.

  4. Some Guy Says:

    I think it’s good that microsoft isn’t dropping zune. and it was a smart move for them to combine the marketplace with xboxs video/music store. I think the zune will start to catch up (slowly) if they use the intergration to the 360 right.

  5. Andre Richards Says:

    “Something that needs to be considered is the rumor that Apple will drop the iPod Classic from their lineup this fall[…]”

    There is no such rumor. None of the best Apple rumors sites have published any such item (and believe me, they would be the first.)

    I suspect you’re making that up to start the rumor itself.

  6. Allan Says:

    I don’t think Microsoft should stop with Zune. I love this device and so do a lot of people. Microsoft would have sold so much if the Zune has received an international release. What about Europe? Uk, France, Spain, etc… They simply didn’t go all out with the zune.

    Limited vision = limited success.

    Hopefully, the zune HD will received an international release.

1 Trackbacks For This Post

  1. Does the Zune HD Stand a Chance? | Technologizer Says:

    […] it shows persistence. The current Zune is a respectable old-school media player itself, but the Zune name feels permanently tarnished. It not only never acquired a tenth of the iPod’s coolness, but came to be associated (at […]