Microsoft Narrows Device Options With Zune HD But Expands Web, Xbox Horizons

Microsoft (NSDQ: MSFT) takes a major step closer to a cross-platform entertainment experience with today’s launch of the Zune HD, Zune 4.0 software and a Zune Net upgrade with web streaming for Zune Pass subscribers. And it should get even closer later this year when Zune video expands to Xbox Live and users will be able to buy or rent movies and TV shows once, and watch it on the PC, Xbox Live or the Zune HD.

With some 3.75 million devices sold since its 2006 launch, the Zune as a device isn’t making a dent in the iPod’s status as #1; it’s not even, as Apple (NSDQ: AAPL) execs gloated last week, number two — the next largest group to the iPod, which has nearly 74 percent of the market, is “other.” Zune has 1.1 percent. (It was Microsoft’s turn to gloat when observers noticed some iTunes changes that made it more like Zune’s software.) The Zune HD, with its sleek form factor, touchscreen, HD Radio, HD video, web browser and 3-D gaming isn’t likely to change that by much. It’s not a mass market device. But creating an integrated video experience that can be pitched to the nearly 20 million Xbox Live players who are already Microsoft customers — and extending it across devices — should help the company expand device sales to those users, while pumping up Zune branding at the same time. (Screenshots and device images.)

That doesn’t mean the Zune HD or other offerings will appeal only to people who already have one or use Xbox Live. The HD Radio, especially in a slick package, fills a niche and it’s the first on a WiFi-enabled device. The Zune has an FM radio, something still missing from most iPods, and it has wireless syncing. The $15-a-month Zune Pass for unlimited subscription music appeals to some, although it finally has competition on the iPhone and iTouch from RealNetworks’ just-launched Rhapsody and soon-to-come Spotify, among others. Microsoft is upgrading the listening experience and the experience; those changes went live overnight.

We’ve already written about some of the things coming with Zune HD, including the decision to drop the non-touchscreen Zunes completely while continuing to support them. Here are a few more aspects worth some attention (I’m expecting a review unit this morning and will follow with a first look):

Zune Pass: Last fall, Microsoft started to include 10 free songs a month for Zune Pass subscribers, effectively bringing the monthly cost down to $5 — if you download the 10 songs every month. Turnd out I’m not the only subscriber who ran into problems with this and wound up leaving a lot of songs on the table. In the future, you’ll pay once and enjoy that content in all the different devices,” Jose Pinero, the new director of communications and marketing for the Television, Video and Music (TVM) division, told paidContent that’s changing with this version: “We’re working to drive communication, to remind people to download the mp3s.” He wouldn’t say how many free downloads have been delivered or what each subscriber averages or how many subscribers the service has.

International: Zune Video will go international via Xbox Live in 18 countries but the Zune HD, Zune Pass and the Zune service are U.S. only. Pinero offered no encouragement for a change in that plan. “At the moment, we’re not talking about potential expansion plans.”

More HD, less space: While Microsoft brags about HD quality video, the hard drives on the Zune HD are much smaller than the largest drives in the preceding generation. For instance, the 16G version ($219.99) holds up to 5 hours of HD video. Those serious about video may want the 32G ($289.99), which Microsoft says will hold 8,000 songs, 48 hours standard def video, or 10 hours HD video. Pinero says the company expects users to use the Zune Pass to move media on and off the device as they want it. He also said they estimate three movies can be viewed on a flight without recharging the battery.

Apps and games: Yes, the Zune HD has some apps and, no, developers aren’t getting another market. Pinero says Zune 4.0 includes a “handful of managed applications” Microsoft will provide for free — a calculator, MSN Weather, casual games. Twitter and Facebook apps are planned for release later this year. The games include some 3-D versions like Project Gotham Racing: Ferrari Edition, Vans Sk8: Pool Service and Audiosurf Tilt designed to take advantage of the 3.3″ OLED multitouch screen with 480×272 resolution, 16:9 display and NVIDIA Tegra processor.