The Microsoft (NASDAQ: MSFT) Zune was doomed from the start compared with the Apple (NASDAQ: AAPL) iPod MP3 player. Between the release of its first model in 2006 up to 2011, the Microsoft Zune peaked at only a 10% share of the MP3 portable music player market in early 2007, and the NPD Group found that the Zune only accounted for 2% of the market by 2009.
It is not surprising then that Microsoft is discontinuing the line. According to a Monday report from Bloomberg, decreased demand and the shift from specialized gadgets to do-it-all smartphones and tablets computers led to the death of the Microsoft Zune. MSFT will instead focus on bolstering the Zune store brand and software on the Xbox 360 video game console and the struggling Windows Phone 7 smartphone operating system.
MSFT stock has been flat since late 2009 and has fallen -8% so far in 2011, so something has to give. And this could be good news for investors following growth in Microsoft’s entertainment division. A February report from IHS Screen Digest found that though Apple’s iTunes still dominates the downloadable video market — not streaming services like Netflix (NASDAQ: NFLX), but actual files consumers save to their computer — Zune has seen significant revenue growth in this arena. Specifically, iTunes share of downloadable videos fell from 74% to 64% between 2009 and 2010, while Zune’s grew from 11% to 18% over the same period.
The question now is: Will the reallocation of resources help Zune grow as a purely digital business, and strengthen the fledgling Windows Phone 7 platform?
Just because Zune hardware is extinct doesn’t necessarily mean that Microsoft will get out of the media player business. There is an opportunity for both the Zune store and the Windows Phone 7 platform to grow — especially on a devoted gadget that carries the Xbox gaming brand. An affordable iPod Touch competitor with popular Xbox 360 and Kinect functionality and features could grow Zune revenue, as well as Windows Phone 7 proliferation.
Microsoft still hasn’t officially announced the end of the Zune line so investors should wait to hear what the company is planning. For now wait and see how things develop, but it won’t be out of line to expect the end of the hardware line to improve MSFT’s already strong entertainment division.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here.
