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Microsoft’s Zune: $100 Million Sales Drop Plus Layoffs Equals Questions

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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

28 Responses to “Microsoft’s Zune: $100 Million Sales Drop Plus Layoffs Equals Questions”

  1. In our house, we have a Zune an iPod and two iPhones. The fact that Microsoft was so late to the party with the Zune is as telling from a cultural and R&D standpoint as anything else. Let's face it. They do lots of things passably, but really excel at nothing. There are so many examples that there's no need to dwell on Vista.

    They are winning the console wars in the US because of a pricing error by Sony, not because of a superior product. Follow the timeline back a bit further and you'll realize that this company took someone else's idea for a GUI-based OS and built a goliath enterprise upon a rickety mountain of DOS.

    Their focus on rigidly proprietary applications and shady business tactics has hurt them in more ways than even they see. The fact that their market share continues to erode as personal and business electronics move away from the desktop and towards smaller devices and the cloud hasn't really hit them the way it should. Why? Because they still have a juggernaut market share and decades worth of legacy business to soften the blow. They are so self-concious when they pursue new ideas because culturally it just isn't part of the company's DNA. Anyone remember Surface?

    Apple has done lots of dumb things themselves in the past, but those decisions are culturally used as learning experiences. Failed products contribute ideas to successful ones. There is simply no way that anyone can claim the iPod and iPhone aren't wildly successful at least in part because of the masterfully democratic design of iTunes and the App Store. That's foresight into the content distribution marketplace — and learning from experience. To think that it all started with some off-the-shelf hardware they wanted to unload.

    I recently set up a major Press Day event at CES for a client and I actually used – gasp – Keynote, not PPT. The fact that they haven't continued to significantly refine their star Office products speaks volumes about Microsoft.

    I'm a big fan of competition, so I hope that Microsoft makes some serious changes before it's too late once again. Starting with their R&D lifecycle. I personally think that Apple's is too fast, but Microsoft is plodding along slower than ever. They missed the first ship that sailed in the mobile devices market. Windows Mobile was a cruel joke and I was certainly one of the guinea pigs. Let's see if they can't get it together for the next generation of smart phones.

    As far as incorporating the Zune competently into other devices… I'll believe it when I see it.

  2. Well i have had a zune since they first came out the zune is good and seems to hold up to anything . I think they should keep going and just make things a little cheaper. Also they need to get more products for the zune like docking stations,and better chargers. I really feel that its a great product and would hate to see it go away..

  3. I have an 80gb Zune and love it. The reason Ipod is dominating is because of the early release, plus the brilliant marketing around.

    For the hardware/software itself, I feel its better than the ipod…the only people that have negative things to say have probably never had one, or have only used it for brief periods of time.

    ex: the "track ball" scrolling feature is far superior to the circle scroll on the ipod.

  4. I bought a Zune 120GB and LOVE IT.. I had an IPOD previously…but would buy another Zune in the future! I have tons of music on mine, and have only used half the storage space. I had a small issue with it, called MS cust. Service and was treated great! I could only get a fraction of the space with an IPOD for the same price.

  5. I own two Zunes. I have never had a single problem with them. I paid $20 less for my 8gb than the iPod alternative, and it has a radio whereas the iPod does not.

    I would be very disappointed to see it go away. I am looking forward to future versions and added features.

  6. The reason why I haven't gotten Zune is that I'm watching Microsoft having cold feet on a number of things. When Bill Gates ran Microsoft he was definately more decisive than the current leadership at Microsoft.

    MSN suddenly dropped their Music platform a couple of years ago, got more cold feet in their commitments to buy Yahoo, and that the first version of Zune was not reported on well.

    The second version of Zune got good reviews but the Z2K leap year bug was an amazing oversight and disgrace and held back my purchase of the Zune. One has to wonder what other bugs they haven't checked for.

    I don't know if Microsoft is really comitted to the Zune. That leaves Creative Lab's Zen more attractive. Especially since it doesn't bind one to a music platform and music service as Apple's iPod and MS's Zune does.

    I'm keeping my eye on the Zen unless Microsoft really commits themselves and take control of the Zune.

    Mind you. I still like Apple's iPod but they can do better pirce and feature wise; and I don't like virtual monopolies.

  7. Zuniesta

    I bought both my son a 30G Zune 2 christmas' ago. He has downloaded many movies, shows and 2000 songs and not one single problem. He's dropped it, sat on it, left in the heat and cold and even played football with it once (he's an offensive lineman). I only paid 79 for a 30 gig, how much of an I-Pod will that get me? I'll stick with the Zune anyday!

  8. I was late to the digital party but I love my Zune. I work a boring assembly line job and my NPR podcasts, major network newscasts and Countdown With Keith Olberman keep me informed and entertained. I've had to replace mine twice, glad I got the warranty, but I would rather use Zune than give Apple any more market share. Seems like 90% of the accessories such as speakers, docking stations and the like are all Ipod all the time…THIS is a free market? I don't think Microsoft did a very good job of marketing, hence the "in touch" types who've never heard of Zune…but those "hipsters" don't know what they're missing. If you prefer "my tunes" to iTunes, give a Zune a try.

  9. I have had a number of ipods over the past few years all really great easy to use and great customer care from Apple. I really to be honest haven't had the chance or desire to use a Zune. Microsoft at best does a decent job on writing software why try and compete with a company that has been making hardware and knows how to. Microsoft's efforts in this area have been mediocre to say the least. The Xbox has continuously been plague with over heating issue the Zune's software issues and let us not forget MSNtv. Speaking of Microsoft and trying to compete with Apple, Windows 7 is nowhere near being any better than OSX than Vista promised to be. Remember when Microsoft was a leader and an innovator, yeah me either.

  10. "I have a clue for you. If you have never heard of Zune you are definitely not “in touch”.

    I consider myself to be in touch and I have never heard of a Zune, nor do I want to. It is probably another overpriced gadget that nobody really needs anyway. I watch the news, have a cell phone, and keep up to date on current events. What more does a person need to do these days to be in touch? You don't have to run out and buy the latest, greatest gadget to be in touch.

  11. The mark of a market leader is that even in bad economy, their products rarely gets discounted. That is Apple and the iPod. Microsoft keeps discounting their crappy Zune and still sales are lagging. With lower prices, lower sales volume, it is no wonder they lost $100M in sales. Unlike the PC where they owned the OS market and could bully consumers into using IE, they can't do the same in this space. Zune isn't the cool gadget to have and in this space, cool counts for a lot.

  12. I have the Zune and it works great for me. I'm happy that there is another decent product out there so that consumers aren't forced to purchase the IPOD. Personally I would rather purchase any other brand besides Apple.

  13. 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.

  14. 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.

  15. 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.

  16. 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.

  17. Kim Balkom

    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.

  18. Staci D. Kramer

    @ 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.

  19. 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.

  20. Deb Brownson

    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!

  21. 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.