So why is Apple so scared?
Here are five reasons:
1. Microsoft is hatching a consumer media "perfect storm."
Apple fans assume iPod will face Zune in the market, mano a mano, like other media players. But that's not the case. Zune will be supported and promoted and will leverage the collective power of Windows XP, Windows Vista, Soapbox (Microsoft's new "YouTube killer") and the Xbox 360.
Microsoft will make the movement of media between Windows, Soapbox and the Zune natural and seamless. The Zune interface is just like a miniature version of the Windows Media Center user interface and is very similar to some elements of Vista.
Apple fans are overconfident in the iPod because Apple once commanded 92 percent of music player market share, a number that has since fallen to around 70 percent. About 30 million people own iPods.
But Microsoft owns more than 90 percent of the worldwide operating systems market (compared with Apple's roughly 5 percent), representing some 300 million people. The company expects to have 200 million Vista users within two years.
The Zune will plug directly into the Xbox via a standard Universal Serial Bus cable -- a fact Microsoft will drill into the heads of Xbox users on the Xbox Live online gaming service. The Zune Marketplace will be integrated with, and promoted by, the Xbox Live Marketplace.
Apple faces the prospect of competing not with the Zune alone, but with a mighty Windows-Soapbox-Xbox-Zune industrial complex.
2. The Zune is social and viral.
Since the iPod first came out, times have changed. The rise of social networks like MySpace.com and viral Web 2.0 sites like that of YouTube Inc. have transformed the expectations of young people about sharing and using media. In the context of these trends, Apple is old school. But the Zune, with its peer-to-peer wireless file sharing, is both social and viral.
Tweens, teens and twentysomethings have acquired the habit of feverishly sharing videos and songs. Today, they mostly have to wait until they get home and use their PCs to do so. With the Zune, students will be free to share music, videos and photos right there in class. They'll be able to pass notes to one another. The Zune isn't just a solitary music player. Think of it as a portable, wireless, hardware version of MySpace.
3. Zune may have more programming.
Apple pioneered workable, for-pay music and TV show downloading, and is starting to do the same thing with movies. It deserves a lot of credit for that. Ultimately, however, the value of iTunes, Marketplace and other music stores will be judged by the quantity, quality and price of available media -- not who got there first.
While Apple launched its movie business with movies from Disney (where Apple CEO Steve Jobs sits on the board), Microsoft has already lined up Twentieth Century Fox Film , Paramount Pictuers, Sony Pictures Entertainment, Universal Pictures, Warner Bros., Lions Gate Entertainment and MGM Pictures.
For TV shows, Microsoft will offer programs from A&E, Animal Planet, the BBC, The Biography Channel, Cartoon Network, CBS, Comedy Central, Discovery Channel, Discovery Health Channel, Discovery Kids, E Entertainment Television, Fine Living TV Network, Fox, Fuel TV, FX, HGTV, The History Channel, MTV, Nickelodeon, Nick at Nite, PBS, Speed, Spike, Travel Channel, TV Land, VH1 and others.
4. Zune's screen is better for movies.
Apple's tiny screen is so high-quality that people are willing to watch full-length movies on it. But the Zune's screen is just as good -- and larger than the iPod's. More importantly, it can be turned sideways for a wide-screen movie experience, which is vastly superior to watching movies on an iPod.
5. Zune is actually pretty cool.
The Zune is unlike any product Microsoft has ever shipped. It's actually very nicely designed, surprisingly minimalist and (dare I say it?) "cool." (Zune marketing looks cool, too. The user interface is fluid and appealing -- and, again, like MySpace -- customizable. Users will be able to personalize the Zune interface with photos, "themes," "skins" and custom colors.
So while Apple fans are brimming with confidence that their beloved iPod will continue to vanquish all foes -- including Microsoft's laughable folly -- Apple sees the big picture and is rightly nervous about it.
Even if Apple is able to retain its lead, it could still be hurt -- badly -- by the Zune, which will capture mind share, grab market share and squeeze Apple on pricing.