Why Microsoft's Zune scares Apple to the core

Even if Apple is able to retain its lead, it could still be hurt -- badly -- by the Zune

Compared with Apple's latest iPod, the Zune is a slightly larger, slightly heavier, slightly less elegant device.

So why is Apple so scared? 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 iPod fans are overconfident in part because of Apple's dominant media player market share, which is currently higher than 70%. About 30 million people own iPods.

But Microsoft owns more than 90% of the worldwide operating systems market (compared with Apple's roughly 5%), 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 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.

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