Zune moving at slow tempo
SAN FRANCISCO—Though Microsoft's answer to Apple Computer's iPod juggernaut officially went on sale nationwide Tuesday, the Zune wasn't exactly flying off the shelves in downtown San Francisco. — At two retail outlets, the new media player wasn't even on the shelves.
Context & Ripple Effects
Microsoft introduced the Zune on November 9 and put it on sale nationwide this week, its first direct hardware challenge to Apple Computer's iPod. The launch came bundled with an unusual concession: a confirmed agreement to pay Universal Music Group a percentage of every player sold — a revenue-sharing deal device makers had not previously offered labels.
The opening days are testing whether that goodwill buys shelf space. CNET found the player absent from shelves at two downtown San Francisco retail outlets on launch day, a weak start against the iPod's entrenched retail position.
First-order effects
- Every Zune Microsoft sells now carries a built-in royalty obligation to Universal Music Group, raising its per-unit cost relative to the iPod at exactly the moment weak early sales limit its ability to spread fixed launch costs across volume.
- Retailers who left shelf space empty on launch day are making an implicit bet on which ecosystem deserves floor space heading into the holiday season.
Second-order effects
- If Microsoft's Universal deal becomes the price of admission, other record labels have leverage to demand the same percentage from any hardware maker entering music — a new cost line for the whole portable-player category.
- Apple faces no pressure to match the royalty model while the iPod outsells the field, letting it keep pricing flexibility that a royalty-burdened rival lacks.
Third-order effects
- A pattern of content owners taxing devices rather than competing on distribution would restructure digital-music economics around revenue shares, favoring incumbents like Apple whose scale lets them absorb or refuse such terms.
- Sustained weak retail traction would push Microsoft toward deeper vertical integration — owning more of the manufacturing and service stack — to control costs and differentiation it cannot get through partners.
The trend: Portable music is consolidating around Apple's iPod ecosystem, forcing challengers like Microsoft to buy label goodwill through revenue-sharing deals that raise their cost structure.