In a bid to up its competition with Apple and its market leading iPod line, Microsoft last night unveiled a second generation of Zune portable media players, along with completely revamped software and services. Unlike the first generation, which came only in a single 30 GB model, Microsoft now offers three products. The two new versions include 4- and 8 GB flash memory based units and an 80 GB Zune with a hard drive. All are sleeker and smaller than the original Zune and appear to offer better competition with Apple's devices.

"Today we're making big bets on games, music, video, and connecting these entertainment experiences to help change the way people play," Microsoft chairman Bill Gates said of the Zune. "I'm blown away by what \[the Zune team\] has been able to do in a year."

And what a year it's been: Coming to market after an astonishingly short six month development time, the original Zune came up short in just about every category. To date, the Zune has sold approximately 1.2 units, compared to over 32 million iPods in the same time period. This time around, however, Microsoft is looking to make up some lost ground. In addition to the new form factors--the old 30 GB Zune model will continue being sold as well--Microsoft is unleashing completely revamped, new-from-the-ground-up, versions of its Zune PC software and Zune marketplace online service. Additionally, the company is making a Zune Social service available, which will add social networking functionality to the product line.

While many had expected new Zune devices, the big news this week, really, is that Microsoft will soon be offering DRM-free music from Zune Marketplace, following in the steps of Apple iTunes, Wal-Mart, and Amazon.com. And though Microsoft will use an industry standard MP3 format for its DRM-free tracks, a la Wal-Mart and Amazon, for the widest range of compatibility, the company is doing something none of its competitors are: It is offering those tracks with no watermarking or other digital tracking technologies. "They're pure MP3s," Zune marketing director Jason Reindorp told me in a recent briefing, noting that Microsoft "absolutely refused" to offer tracking technology or use a non-standard music format.

Good for them. While Apple was first to market with DRM-free tracks, the company is using the AAC audio format, which offers excellent quality but is incompatible with many devices and software. MP3 is the most compatible choice, and the one that will work with virtually every music-related device and software available today.

There's a lot more going on here, but I've got more information and a ton of product shots available now on the SuperSite for Windows.