Stung by recent criticism of the marketing and functionality of its Zune portable media player, Microsoft this week revealed its plans for the device and--in a rare disclosure--its expectations for sales during Zune's first holiday season. According to a Microsoft representative who briefed me about these plans yesterday, the company expects to ship more than 1 million Zune players by the end of its fiscal year, which ends June 30, 2007. That's enough to give Zune 10 to 20 percent of the market currently dominated by the Apple iPod, with which the Zune most closely competes.

Assuming that happens, Zune wouldn't be a total wash, because during last year's holiday season the number-one non-iPod product in the more than-$200 MP3 player market sold only a fraction of that number. It's also worth noting that Zune went from its first whiteboard scribbles to a finished product in about 10 months--a monumental feat for a company that isn't particularly well known for moving quickly.

Many--myself included--have criticized or even decried Microsoft's entry into this market, the underwhelming marketing of the device, and the lack of certain features. Microsoft has admitted to making some mistakes--such as the viral marketing scheme that appears to have fallen flat, in my opinion, with consumers--but it defends its decision to enter this important market now and says it's here for the long haul. I'm told that Microsoft will ship numerous functional updates to the existing Zune player and launch new Zune devices with new form factors and unique features in the next year.

The key to Microsoft's decision to make the Zune, I was told, is that although Apple controls 75 to 80 percent of the overall MP3 player market, Apple almost completely controls the only parts of the market that make money (i.e., large-capacity MP3 players). For all its work creating the underlying technologies for the PlaysForSure initiative, Microsoft watched as its numerous hardware partners managed to collectively steal only tiny amounts of share in the low-end flash memory player market. This business model clearly isn't sustainable.

Speed was another problem. Although Microsoft could do the plumbing work to support new features (e.g., podcasting) as they arrived--and then revise Windows Media Player (WMP) to support those features--getting all its hardware and services partners lined up at the same time to support new features proved to be impossible. For Microsoft to offer any kind of concerted competition for the dominant iPod, it had to do so alone. And Apple had proven that there were billions of dollars to be made in portable music. Thus, the people behind the Zune could champion the potential to Microsoft's leaders.

To ship a product quickly, however, Microsoft had to look at core functionality and try to deliver some key differentiators. Although the Zune does lack several features that the iPod boasts, customers rarely use most of those features anyway, and Microsoft intends to close the gap in time. Furthermore, the Zune does include a few unique features of its own, such as Wi-Fi connectivity and a Send feature that lets Zune users wirelessly share content.

This holiday season is a "beachhead" period for Microsoft, during which it's trying to change people's perceptions of the MP3 player market from "Apple and everyone else" to "Apple and Microsoft and everyone else." From this perspective, the company has been somewhat successful. Despite lukewarm reviews, the Zune is a hotly debated product among influentials. Looking forward, Microsoft intends for Zune to be profitable in 12 to 24 months. "This is the fuel we need to go after Apple on a long-term basis," said the Microsoft representative.

There's a lot more to this story, of course, so I'll provide a more in-depth look at Microsoft's plans for the Zune later this week on the SuperSite for Windows. Stay tuned.
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