Microsoft's Strategy To Grab iPod Market Share: Subsidize Zune To the Tune of $150

by: Carl Howe September 20, 2006 | about stocks: AAPL / MSFT    
Carl Howe

Carl Howe

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Mike Evangelist, writer of the excellent blog Writer's Block Live, had an interesting comment on my weekend article on Microsoft's marketing strategy for its Zune music player:

...it occurs to me that there may be another answer that explains Microsoft's odd behavior regarding the price and compatibility of the Zune. I think they are going to subsidize it...sell them for $99, or something like that. Buy their way into the market, then milk users for the rest of their lives as they buy/rent media.

zunes
Microsoft's Zune: ready to do battle with the iPod this Christmas?

I think Mike may have hit on Microsoft's plan. It's very akin to the XBox 360 pricing strategy, where Microsoft loses about $156 per XBox 360 they sell, with the assumption they'll make up the difference in game and Xbox Live revenues sometime in the future. With music subscriptions offering up visions of consumers playing $120 to $240 a year to Microsoft, subsidizing a Zune player by $150 or $200 might make a lot of sense to grab market share. While it would cost Microsoft something around $300-$400 million this year in subsidies and more next, such a strategy would have a chance of breaking Apple's dominant position. However, history doesn't favor a Microsoft win here, though; there are no examples of a company successfully building a sustained profitable business from such a subsidization strategy with one exception: the Sony (SNE) Playstation 2.

So keep your eyes peeled for the possibility of $99 30-GByte Zunes. If Microsoft does that, Christmas music player sales could get very interesting.

Full disclosure: I own shares of Apple.

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This article has 11 comments:

  •  
    Sep 20 04:50 AM
    That would be kind of a crazy business strategy. Lose money on MP3 players, lose money on songs. The only reason to do this is to spite Apple (which, of course, is not beneath Microsoft).
    Reply | Link to Comment
  •  
    Sep 20 05:01 AM
    Subsidising is what greate rthan 80% of the mobile (cellular) business is built on. With smart phones now becoming the norm, contracts have had to be increased from 12 months to 18 months to allow operators to recover costs and show positive cash on a consumer.
    Reply | Link to Comment
  •  
    Sep 20 10:49 AM
    Interesting article. As a novice critic I want to be careful with my statements and wording. I apologize for any mis use of words. I hope I can illustrate and clarify my point.

    I'm curious on other obstacles that microsoft will have in gaining market share. Apple's existing market share, knowledge on the MP3 Player industry and Apple's knowlege that Microsoft doesn't have play a role. To clarify, Apple has everything all figured out and is 5 years ahead of Microsofts planning and knowledge, Apple has systems and experts already working to increase and maintain market share, Things that Microsoft haven't thought of. It will be an uphill battle the entire way, so taking a risk by losing money everytime a product is sold seems like an exponetial way to lose money and disrespet.

    In addition, Apple has technical support, systems and man power already in place to continue success. Good luck Microsoft.
    Reply | Link to Comment
  •  
    Dec 07 03:05 PM
    You say iPod is ahead 5 years of Microsoft's Zune. And way ahead of planning and marketing.

    You must be forgetting something here. Microsoft is not the underdog here but rather apple. It has 85% of the market share (OS) and has eaten away the competition from then on. Just look at how IE crippled mortally Netscape. These guys from Microsoft, do not underestimate their planning strategy methodologies, they can grab the market by pouring in money.

    Sony and Nintendo was laughing before when they heard Microsoft was getting into the gaming business, look who's laughing now.

    So for Apple, I will be very nervous, your hold on the market might as well be like Netscape's hold on the market now.

    Besides, I have both ipod and Zune, I prefer Zune and I'm ready to put my latest generation ipod up for sale in e-bay. I have a very delightful experience in Zune.
    Reply | Link to Comment
  •  
    Sep 20 11:13 AM
    MS IS ON SHAKY ground here .. if they do this ..then they seem to haven given up already .
    subscription music is already a crowded field . sirius xm napster already are getting swamped in this field . who wants to spend 200 odd dollars a year and not own the music .. easier to bit torrent for free .

    itunes is seamless .. so the zune cannot compete wsith D L music ..

    some small start up will get the subcription service right .. and then maybe M S WILL BUY THEM .. LIKE WEB TV ..

    PEACE
    Reply | Link to Comment
  •  
    Sep 20 11:13 AM
    MS IS ON SHAKY ground here .. if they do this ..then they seem to haven given up already .
    subscription music is already a crowded field . sirius xm napster already are getting swamped in this field . who wants to spend 200 odd dollars a year and not own the music .. easier to bit torrent for free .

    itunes is seamless .. so the zune cannot compete wsith D L music ..

    some small start up will get the subcription service right .. and then maybe M S WILL BUY THEM .. LIKE WEB TV ..

    PEACE
    Reply | Link to Comment
  •  
    Sep 20 12:03 PM
    The 'subsidy' argument does not hold much water in this case. Selling a Zune for such a low price will simply result in people being able to buy a cheap PMP. I wonder how many Zuners will fill their machines with Microsoft sourced content as opposed to music and videos from other sources.
    Reply | Link to Comment
  •  
    Sep 20 03:19 PM
    While this may seem like Microsoft is working to take shares from Apple, this feels more dangerous for Microsoft than Apple. Given that Apple doesn't really make money from the music and video it sells on iTunes but only on the iPod hardware, I don't see Microsoft making a better model to make back what it loses on sales of Zune. Microsoft will more likely lose money on both ends...or so is my initial opinion right now. I might eat my words later, or just change my thoughts.
    Reply | Link to Comment
  •  
    Sep 20 10:39 PM
    Microsoft could _pay me_ to use a Zune, but if it has a user experience anything like most MS products, I'll stick with my $200 ipod, thanks.
    Reply | Link to Comment
  •  
    Sep 21 09:39 AM
    Maybe MSFT could just directly pay Apple not to sell iPods, kind of like what the feds do with farm subsidies. It might be cheaper for them in the long run.
    Reply | Link to Comment
  •  
    Oct 06 02:35 AM
    "Heavily subsidized" Zunes are just one of the ten iPod vs Zune Myths answered by RoughlyDrafted Magazine:

    10 iPod vs. Zune Myths
    www.roughlydrafted.com...
    Reply | Link to Comment
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