updated 12:30 pm EDT, Thu July 30, 2009
Zune Sales Crashing
Microsoft's struggling Zune media players may have been single-handedly responsible for a plunge in revenue at the Entertainment and Devices group and could be a sign of much deeper trouble for the line as a whole, analysts said Thursday. Although only a small part of Microsoft's poor spring quarter, revenues the group that handles both the Xbox 360 and Zune dropped by 42 percent year-over-year and alludes to Zune sales falling precipitously in the same time span. The Xbox 360 isn't likely to have contributed to the fall as it was one of the few consoles to see more systems shipped this spring than last.
By contrast, market leader Apple also saw its iPod revenue decline 11 percent but still has over 70 percent of the US market, according to NPD data. Apple during its fiscal conference call admitted the drop was likely the sign of a long-term reduction in the dedicated MP3 player business, but its softer decline and steady market share point to some Zune owners simply opting for iPods or exiting the market altogether. Microsoft has never typically had significantly more than 2 percent of the US market.
While the company has never published Zune unit numbers since reaching the 2 million mark in 2007, the numbers are low enough that Traditional Capital Management analyst George Kurian is calling for Microsoft to exit the MP3 player market and focus on Windows Mobile smartphones. He notes that some, unnamed retailers have stopped selling Zunes entirely as their sales have been "so disappointing" that it leaves no other real alternative.
"Microsoft should abandon Zune and follow Apple's strategy," he says.
He suggests that Microsoft should consider buying Palm, which would give it a modern, multi-touch smartphone platform with little investment. Microsoft isn't expected to have multi-touch phones of its own until Windows Mobile 7, which may not arrive until April.
Microsoft is unlikely to take the advice with the impending September release of the Zune HD, as it solves many of the problems associated with the Zune line. It brings multi-touch input with web browsing and should also bring technical superiority through an OLED screen, HD Radio tuning and 720p video playback. The new player will bring attention back to the Zune brand and also close the two-year gap between the iPod touch and Microsoft's entry.