GAMESTOP S&P500
Don Hogan Charles /The New York Times file  /  Redux Pictures
Does this look like a place to buy a Zune? No, we didn't think so, either. It's a GameStop store in Manhattan. The national retail chain is ending its sales of Microsoft's portable media player because of its weak link to gaming.
By
msnbc.com
updated 5/28/2008 10:36:10 AM ET 2008-05-28T14:36:10
ANALYSIS

So, GameStop has decided to stop selling the Zune, Microsoft’s portable media player. It’s a decision that seems to make sense.

The large retailer of all things gaming “may have originally elected to carry Zune with the expectation that it would become more gaming-focused over time, and that really hasn’t happened,” said Susan Kevorkian, portable media player analyst for IDC Research.

“Zune comes out of the same group at Microsoft that produces the Xbox,” she said. “And when Zune was introduced in fall, 2006, there was a lot of buzz around the possibility of offering game content on Zune, and more of a tight, interconnection between the Zune ecosystem and the Xbox ecosystem. That hasn’t come to pass.”  (Msnbc.com is a joint venture of Microsoft and NBC Universal.)

The Zune “is still very much a music-focused device, and for a gaming-focused retailer, it doesn’t necessarily fit into their product mix.”

Microsoft’s counterpoint to Apple’s hugely successful iPod has faced an uphill battle in many ways since it launched.

So far, more than 2 million Zunes have been sold, compared to more than 100 million iPods, which have been on the market since late 2001. In the first quarter of this year alone, Apple sold 10.6 million iPods.

There are also other highly regarded portable media players out there, from companies such as SanDisk, Creative Technology and Samsung. But Apple dominates the field with about a 70 percent market share. The Zune’s is between 3 and 4 percent.

“The Zune has always struggled, but every competitor in the segment is having difficulty standing out from underneath the shadow that Apple casts on the market,” said Rob Enderle, president of The Enderle Group, a consulting firm that studies technology trends.

“Nobody has seemed to find the right product to penetrate the iPod armor.”

Now, in addition to its music offerings, Microsoft has expanded Zune’s emphasis to TV downloads. Earlier this month, the company started selling episodes of some shows from NBC, Comedy Central and the Sci-Fi Channel at its Zune Marketplace Web site. Apple has been selling TV episodes from its iTunes store since late 2005.

‘Good momentum online’
GameStop "decided to discontinue selling the Zune as it was not working with our product mix," said Chris Olivera, vice president of corporate communications for the Texas-based company, which has more than 5,200 stores in the U.S. and in 15 countries worldwide.

Zunes are still available through GameStop until the product "runs out of its current inventory," he said.

Adam Sohn, Zune’s director of marketing, issued a short statement about GameStop’s decision.

“We have a set of great retail partnerships that give Zune a strong presence at retail including Best Buy, Target, Wal-Mart and others,” he said.

Microsoft has “seen good momentum online and at retail over the last few months, including a great response to our recent spring (software) update.”

That update, version 2.5 of Zune software, includes improvements to the what is known as “Zune Social,” an online community for Zune users, as well as improvements to the device itself to allow for “gapless playback,” multiple-device syncing and advanced song information editing, according to the company.

Gaming isn’t really mentioned at the Zune software site, although there is this reference: “Plug your Zune into your Xbox 360 console, and listen to your music while playing your favorite games, or stream media to your Xbox 360 over a home wireless network.”

That literal connection may not have been enough of one for GameStop to continue carrying Zune.

“Microsoft has been slow to address some of Zune’s shortcomings to make it more appealing to portable media owners and potential buyers,” said Kevorkian.

“For example, ever since its inception, Zune has had a very attractive color display that would suit video content,” she said. And yet, the screen was not being used to full advantage until recently when the company decided to offer “downloadable videos outside of music videos.”

Also, “since launch, the Zune has had Wi-Fi support, which is a great innovation in portable media players,” she said.

“However, Zune’s Wi-Fi can only be used to connect with other Zune users, of which there are relatively few, instead of enabling users to connect directly via Wi-Fi to an online site selling compatible content” for downloads, “without having to use the PC as an intermediary.”

Still, Kevorkian said, “Now is an opportune time for Microsoft to be making those changes because the portable media market is maturing. Some of the companies that were previously very strong competitors have faltered recently. So it’s an opportunity for Microsoft, which has the resources and commitment to the space, to further push its product. But it can’t do that without refining it a bit further first.”

Ringing it up
Enderle raises a larger question about the future of digital music players in general. He believes that as more cell phones, such as those by Nokia, Sony Ericsson and Samsung, as well as Apple’s iPhone, incorporate music into mobiles, stand-alone players will be considered just another extra device to have to carry around.

“Right now, we’re probably at the early phases of what the PDA (personal digital assistant) market went through, when people suddenly realized that a lot of this stuff that they were using their PDA for, they could use their cell phones for,” he said.

“And folks pretty much stopped buying PDAs, and now the market is pretty devoid of those products. I think we’re at sort of the beginning of the same type of cycle with MP3 players, where people are increasingly discovering they can use their phones for something else, to listen to music, and no longer need an MP3 player.”

Enderle thinks it’s one of the reasons Apple created the iPhone. “It was their realization that this migration was coming, and so they wanted to make sure they had a product that people could move to that they built, as opposed to something like the Sony Ericsson Walkman phone, or another along those lines,” he said.

Kevorkian said worldwide, shipments of personal media players are expected to increase from 200 million in 2007 to more than 212 million this year,

Of that number, 51.9 million players will be sold in the U.S. Next year, U.S. sales are expected to reach 53 million units “before declining in 2010 to 51.7 million,” she said.

“Keep in mind that this is a pretty modest decline. That comes from an increasingly mature market, where more and more people who are the target market for personal media players may already own one,” and are not ready to move to a newer model.

She doesn’t think the cell phone will be replacing the digital music player any time soon.

“While there will certainly be consumers for whom an all-in-one device scenario is appealing, a handset isn’t optimized to be a primary multimedia player,” Kevorkian said.

“A handset has limited battery power and power management capabilities, and at the end of the day, it needs to be able to make a phone call. And if the user can’t do that because they’ve used up the battery playing music and watching videos, then the handset hasn’t done its job.”

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