Microsoft’s Entertainment and Devices division, particularly the Zune group, reportedly was hit hard in Thursday’s unprecedented layoff of 1…

imageMicrosoft’s Entertainment and Devices division, particularly the Zune group, reportedly was hit hard in Thursday’s unprecedented layoff of 1,400 employees and the company’s plans to cut up to 3,600 more jobs. (Microsoft (NSDQ: MSFT) isn’t breaking down the layoffs by numbers and departments.) Late Friday, when the company filed its 10-Q, the “why” was a lot clearer: “Zune platform revenue decreased $100 million or 54 percent reflecting a decrease in device sales.” Either would have been enough to wind up the “ding, dong, the Zune is dead” crowd; together, you’d think it’s time to buy some landfill space.

Not so, insists Zune spokesman Adam Sohn. The day the layoffs were announced, he told me “Zune is committed and on track to deliver against our current product roadmap, and are as focused as ever on providing great software and content-powered experiences to help bring our connected entertainment vision to life.” After the 10-Q was filed, I asked Sohn if he wanted to update that statement. He said it is “still true” — “we are in this business for the long term and committed to it.”

How to explain the numbers? Sohn said there isn’t much data to share about the 10-Q but mentioned a mix of factors that could have contributed: steep discounting across the line and “massive special prices” on the older 30 gig units accounting for some of the drop; the tough economy overall and a shrinking MP3 category. (The latter didn’t seem to hurt iPod sales in the holiday quarter.) The 10-Q details the number of Xbox consoles shipped — 6 million — but not the number of Zunes shipped or sold.

Beyond the device: But Sohn focused more on where Zune is headed: “We have a broader vision than just selling MP3 players, we are thinking about more connected entertainment experiences driven by the Zune software and services for not only Zune device owners but other ‘tuners’ as well. This vision requires continued investment in the business as we grow the capabilities of what the service needs to do for other screens and devices.”

Free Zune services: Two of the biggest developments for Zune in 2008 weren’t device-specific — positioning Zune’s free software app for non Zune-owners and offering Zune Marketplace subscribers 10 free tracks a month as part of the $14.95 monthly fee. The songs can be burned to CDs and moved to other devices so are not Zune reliant. Both developments move the Zune concept beyond the device but it’s not clear yet how, or if, Microsoft will make using other “tuners” as simple as staying in the linear software-device environment.

I’m a Zune user with three devices and a Marketplace subscription. (We also have an iPhone in the house and numerous MP3 players.) I’ve been fooled as a consumer by Microsoft before, investing hardware and software the company has stood behind steadfastly until the day it was dumped. But you would think that if Microsoft had plans to shut down Zune any time soon, doing it all at once would have fit in with the layoffs and cost cutting announced late last week.

Chris Stephenson, GM of global marketing for Microsoft

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  1. I don’t doubt that many or even most Zune owners are satisfied with what they have. Here’s my thing: Apple dove into the MP3 market when that market was already well on its way to maturity. The iPod quickly made a big splash, and iTunes has played no small part in helping the iPod acquire a 70% market share. Apple did not engage in illegal, monopolistic business practices in order to achieve that level of prominence; nor did Steve Jobs hypnotize buyers, steering them towards the iPod.

    When the iPod was released in October of 2001, it succeeded during a recession caused by the terrorist attacks of 9/11. If the current economic climate adversely affected the Zune and other consumer products, then it stands to reason that it also adversely affected iPod sales. Yet, Apple reported a growth in iPod sales for the most recent quarter, versus a 54% drop in Zune revenues. How much better would the iPod have faired this quarter without the deepening recession?

    I believe that Microsoft and its investors need to re-evaluate the Zune with regard to how it affects other products, and how it affects shareholder interests. If I’m a Microsoft competitor — and I don’t believe that Apple and Microsoft compete in the sense that they appeal to very different groups of customers — then I truly hope that Microsoft continues to throw money and other resources at the Zune. Let them and their investors learn the hard way. Again.

  2. It would seem foolish to me that Microsoft would even entertain the idea of pouring more money into the Zune. I would consider myself "in touch" and I've NEVER even heard of it before today!

  3. Deb,
    I have a clue for you. If you have never heard of Zune you are definitely not "in touch".

  4. I received a zune as a prize in June of 2007, and have since had it replaced 3 times, making this my fouth zune within a year. Perhaps their sales would do better if the things would work properly for more than a month without it either needing to be reformatted, sent in for repair (i.e. replaced) or software upgraded. I can guarntee if I had paid for it, I would have returned it and gotten my money back after the second replacement.

  5. Staci D. Kramer Monday, January 26, 2009

    @ Shannon — Sorry you've had such woes. For what it's worth, I've used or owned more than a half-dozen zunes (different size drives, both generations) and haven't had anything like that.

  6. My two boys both have a zune. I have had excellent performance and service for any issue we have experienced, most of which was user errors. I would hate to see them cut the services, its great compared to itunes. My sister has an ipod and always complains that she has to keep paying to redownload things she already got when her device crashes. At least with the marketplace your purchases and downloads are always there, included in the monthly price which is way less then I would pay if we had to buy each song individually.

  7. i've had a zune since may 2008 and only had to reformat it once, and it's always been amazing. the only thing that sucks is that the music does disappear once you stop paying for marketplace but my 8g zune touch is amazing. the cost is ridiculously high but the product is fantastic. if you have problems with it, it's probably either you don't know how to properly take care of it or you drop it and hit it. it happens, but don't blame the product cause you're clumsy.

  8. I work for a major retailer & we have nothing but complaints & returns on the Zunes. During this past holiday season, the Zunes only sold once everything iPod was sold out & a lot of the Zunes came back to be exchanged once we got the iPods back in stock. For every one iPod that gets returned, I see 4 or 5 Zunes. Microsoft needs to rethink this product.

  9. I have a 30G and I love it. Didn't get an Ipod because Apple tells you how to use it,( ie. quality of mp3s video etc., please give us your money). With the Zune I can encode the music/ video at the bitrate i want, I have control over the device, not Apple standing over me with their hand out.

  10. I've owned 3 zunes, all of which worked great until I did something to them. The device works perfectly fine as far as I'm concerned and the only problem I have with the software is the redundancy of WMP vs. Zune. I have bought 2 replacement zunes and will probably continue to do so.

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