Computerworld light on facts heavy on speculation

October 1st, 2006 · 2 Comments

Mike Elgan, long time Microsoft Pundit, posted an unusual reality this week with his “Why Microsoft’s Z une scares Apple to the core” piece in the Computerworld. Although it is of course good PR to offer an alternative to what conventional wisdom, and a few analysts have stated, is that Microsoft has a long hard road to follow to upset Apple’s successful ecosystem they have going with the iPod/iTunes products.I have no problems with these views if they are well thought out and rely on a deep understanding of why products succeed and fail, rather than trotting out random thoughts masquerading as truisms.

Firstly I understand that the title is a provocation and undoubtedly has had the desired effect (otherwise I wouldn’t be writing this), but Steve Jobs doesn’t do scared. Apple may do concerned, they may do reactive, but after watching Jobs for 20 years, he does not do scared.

The secrets of iPod’s success appear obvious: beauty, simplicity and “extreme coolness” — three characteristics Microsoft has never achieved in any product.

To a layman and casual observer, this seems reasonable, and indeed it is. However this masks a more complex execution plan about how Apple has executed exceedingly well. The success of the iPod comes down to experience and execution. When I say experience, I mean the customer experience, from the initial advertising experience, the experience in the Apple Store, the brand experience, and the iTunes Experience. As someone who does marketing and messaging all day long, we sit in amazement at the depth and skill of Apple’s Marketing who stand wholly on their consumer product skills. From Regis McKenna in 1984, Apple’s marketing have been waiting for this day to flex their muscle. The success of the iPod/iTunes is based on an execution that was close to perfection. You only need to go into an Apple Store to understand how deeply invested in the brand the consumers are.

Microsoft’s success in the corporate world is in my opinion a challenge to their being able to respond to the iPod experience. This corporate experience will hinder them because it the very fundamentals of Windows distribution is channel outwards, not customer inwards. It will be very interesting to see how they channel(ize) the product. In fact the whole article is predicated on an unproven premise that they can use the existing channel to market the product. This, although Microsoft will not say so, is very shaky premise to support your argument on, because to date that has largely been a serious challenge to the incumbents Sony et al.

I think that Microsoft has spent a lot of time thinking about the distribution model. The three largest distribution channels, Dell/Lenovo/IBM are of little benefit to them because they are geared to corporate at the 2 tier distribution. I say this because this is strictly a consumer product so the channels available are are materially different, so Microsoft will have to work hard to equip the retail channel with the necessary support to market this product. This of course poses the question, why hasn’t the ubiquitious Walkman been a success in the retail channel?. Is the absence of a music marketplace like iTunes been a major factor, or is this a channel failure?, or both?. I believe that this single thought haunts Microsoft Zune planning. Why was Sony unable to replicate the success of the portable music market into their Walkman Digital Products despite the product being a natural extension of their existing successful products?.

I think that Apple’s deep vertical integration of distribution is a significant challenge to Microsoft to replicate, the fact that they need to do the hardware device themselves is a signal that they (MS) believe that vertical integration is the key.

So lets look at the 5 factors that the article holds up as proof that Apple is “scared” of Microsoft.

1. Microsoft is hatching a consumer media perfect storm. - There is far too much emphasis on the so called power of the Windows Distribution. Although Windows Media Center, a version is Windows XP does ship in large numbers, it is because that is the default OS on a consumer retail desktop. The numbers who use the features of the Media Center are far smaller than the actual users of the Windows XP OS. The vast majority of users never use the features of the media center, instead rely on the Office/Outlook/IE as their main computing experience. The next comment is one that is frequently trotted out and that is “…..90% of the worldwide marketshare for OS…”. The only figure that matters is the number of consumer users of Windows that have the propensity to purchase portable digital music devices. Now scratch the people who have already made the investment in iPods and you have a much smaller number.

2. The Zune is social and viral - This remains to be proven. This is a supposition, not a fact. What is a fact is that iPod is viral, social, and successful.

3. Zune may have more programming - and there may be a lot of things. Amazon has a lot of movies and we shall see if the size of your video back catalogue is a predicate for success in the huge digital music market. You need music first, then you need movies.

4. Zune screen is better for movies - Those who are in the business know that individual features that are easily replicable are not a sustainable advantage.

5. Zune is actually pretty cool - and so is iPod, what is your point?

As I have previously mentioned, Apple continues to enjoy significant Gross Margins on their iPods. They continue to work the supply chain to improve their ability maintain their margins for an upcoming battle. The reduction in the price of the 30GB Video iPod was classic Jobs. It was a signal to Gates that he was going to take the fight to Microsoft. It is our understanding that the Zune Player is being produced at a low in order to enter the market, and it won’t be easy to make it profitable. Microsoft shareholders are not the patient bunch they used to be, and will be looking for a successful execution of this product, or expect more market cap to be shaved off MSFT.

The most likely senario is that:

Consumers will abandon 3rd Party Video/higher end players to go to the Zune Player. This means Creative / SansDisk are going to have a much harder time than they already do.
Microsoft will eventually abandon their Playsforsure partners completely and Sony et al will be forced to respond with their own ecosystems. Real Networks already has started to transistion away, Amazon and Yahoo will be forced to respond, because Microsoft is now competing directly with both of these “partners”.
In the Short term this will have zero impact on iPod sales because Microsoft does no compete in the sub $249 market for music players, of which the Nano has almost total dominance. Microsoft will of course have to sell a player eventually in this space in order to have a hairball’s chance of gaining market share.
In the medium term, Microsoft will carve out a 15-20% market share and declare “Mission Accomplished”, Apple will continue to dominate the digital music market place (60-70%) into the next decade, by then the market will have moved to the next phase.

Only time will tell.

Apple Prepares for Battle

Zune not IPod Killer, a Microsoft Partner Killer

Technorati Tags: apple ipod microsoft msft zune xbox itunes
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KiwiBloke

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2 responses so far ↓

1 Mike Elgan // Oct 1, 2006 at 3:26 pm

Hello, Mr. Bloke. Mike Elgan here.

I really enjoyed your blog post. You make a lot of very good points. In particular, your observations that 1) Apple’s execution, not just coolness, is a major factor in iPod’s success; 2) that features like a larger screen do not add up to a sustainable advantage; 3) that Zune competes only with the video-capable iPod, not the very popular lower end iPods.

Many bloggers, Slashdot posters and e-mail writers characterize my piece as praise for Microsoft and criticism for Apple.

In fact there is not a single line of criticism for Apple in the entire article. In fact, I gushed over iPod (”transcendent design”…”Apple’s media players are so good they have transformed consumer electronics”) and was lukewarm about the Zune (”pretty cool”… “Compared with Apple’s latest iPod, the Zune is a slightly larger, slightly heavier, slightly less elegant device.”)

I did not write that Zune is better than iPod, or that the Zune would succeed, or that iPod would fail, or that Microsoft is better than Apple.

All the semi-nice things I said about the Zune boil down to this: It’s probably a better media player than you expected it to be, coming from Microsoft. That fact, combined with Microsoft’s huge marketing push, are enough to seriously concern Apple.

I wrote the article because I have noticed my fellow iPod enthusiasts “pointing and laughing,” as I put it, at Microsoft’s entry into the media player market (on blogs, in articles and elsewhere), mocking Microsoft’s futile attempt to enter into the media player ring with Apple. But Apple sees the big picture, and is taking Zune — and Microsoft — very seriously.

Some number of people — nobody knows how many — will choose a Zune instead of an iPod for whatever reason (Wi-Fi, bigger screen, false belief that it works better with Windows than iTunes — whatever). The number could be 10,000, 100,000 or even 500,000 in the next two years.

Do actual lost sales hurt Apple or not? Clearly they do, and that’s the sole point of my column.

You write that “There is far too much emphasis on the so called power of the Windows Distribution”

That may be true in some cases, but what if Microsoft adds a link to Zune Marketplace to every copy of Windows, right there on the desktop. And what if Microsoft offers every Windows users free songs, a few TV shoes and a movie or two. Microsoft will probably sell somewhere in the neighborhood of 120 million copies of Windows in the next year.

Remember that the overwhelming majority of iPod owners are Windows users, and that some 270 million existing Windows users have never owned an iPod nor used iTunes. (By contrast, around 30 million people currently own iPods.)

This one very limited marketing act alone is enough to hurt Apple’s market share and mindshare. And there are many other points of contact and influence — especially in areas where Apple has far less influence (business people, gamers, etc.)

Anyway, I enjoyed your honest, thorough and interesting post.

-Mike Elgan
2 Sony Walkman, a march in time « Just a Kiwi Bloke // Oct 21, 2006 at 1:05 am

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