TMO Reports - What Microsoft REALLY Said About its Music Strategy & iPod

by , 11:00 AM EDT, May 28th, 2004

Numerous reports have surfaced in the past two days about comments made by a Microsoft executive in which he was reported to have said the company would produce its own line of portable music players for as little as US$50 to compete with the Apple iPod. The fact is these reports are inaccurate and don't tell the entire story. The Mac Observer has obtained the complete transcript of the executives remarks in an effort to set the record straight and add context and depth to what was really said.

The comments were those of Microsoft Corp. Corporate Vice President of MSN Yusuf Mehdi at the Goldman Sachs' fifth annual Internet Conference in Las Vegas, Nevada on Wednesday. In his remarks, Mr. Mehdi discussed his company's future strategy in the portable music player market and online music sales.

Numerous reports on various Mac news Web sites quote a short, three paragraph story in the Denver Post about the event. In that story, the only exact quote from Mr. Mehdi is a three word, paraphrased comment that reads, "the Microsoft-branded devices will "look and feel" as good as the iPod for as little as $50."

In truth, Mr. Mehdi never said Microsoft would sell it's own brand of portable music players. In fact, Microsoft is licensing other third-party companies like Rio and Creative to use a new and enhanced version of its Digital Rights Management (DRM) technology, code-named 'Janus'. Device makers are prepping new devices for release in the next 2 to 3 months that will take advantage of the Windows Media Audio (WMA) technology. The new DRM will let online music stores and other e-commerce sites offer music, videos, and other digital-media content on a subscription basis rather than for purchase. Users can then transfer the content to portable audio and video devices. When the subscription lapses, the content stops playing on the devices.

Janus will further differentiate Windows Media-based online music stores from standard purchase-oriented stores such as the Apple iTunes Music Store. Companies such as AOL, Napster, and The Walt Disney Company will implement Janus in future online services.

In comparison, Apple's Fairplay DRM is not based on a subscription model, but rather a per-song model of buying each track. FairPlay works only with Apple's iPod, which does not support WMA.

While Mr. Mehdi did say new portable music players from these companies will be much like the iPod, his comments have been taken out of context by a number of news organizations who didn't check the facts. Mr. Mehdi did not directly compare cheaper $50 devices to the more expensive, hard drive-based iPod and iPod mini. In addition, he did not say $50 portable music devices - which industry analysts are convinced will be flash-based and not hard drive-based like the iPod - will have the same type of features as an iPod. His exact words were...

"Number one, our strategy is certainly to offer a multitude of devices. I think the iPod's a great product, but there's a lot of opportunities. They're only in four percent of US homes today, even with all the success they've had. There are a number of other great devices that are coming out. I personally have spent time with a bunch of hardware manufacturers who will launch hardware products when we ship our service that will look and feel as good as the iPod product. And they will undoubtedly be a little bit less expensive. Head-to-head against Apple, we'll have a device that will be available to the consumer. We won't produce it, but it will be available to the consumer...And then we'll have a bunch of other devices in between. Little ones that cost $50 bucks that you go running with. So, the proposition is that you can buy a number of different devices with the MSN Music service as opposed to just a single device from Apple."

In addition to his comments about hardware, Mr. Mehdi also made some interesting comments about Microsoft's online music distribution strategy as well.

"As I look around, I see very few offerings. Outside of the Apple (iTunes Music Store) offering, I think it's been okay that we've taken some time (to launch our service), because I'm not sure any of the other ones out there have done anything of note. We're taking our time. We're going to make a very simple, very easy to use service that will be, among other things, the best way to discover music online. In the discovery part of this, I think that's the part that is sort of untapped and a big opportunity. That will be coming out later this year. We think it's going to be amazing for our business, not just because of what we do for consumers on it, but because of transactions and the relationship with customers on billing and what that does to inform our online ad business. What that will do to really perfect our search service. We want people to be able to search for an artist and one-click buy. (That will be) very powerful...

"...The other thing is, of course, we'll have a very broad selection of music. My goal is that if we don't have the broadest selection, we're tied for the broadest selection of music. We'll have the best discovery (of songs), it'll work with your Windows PCs, and that alone I think will give us a big enough market share that we certainly should be able to go out there and be in a nice horse race, if not take the lead at some point in the future."

Reading Between the Lines

Mr. Mehdi's comments are being interpreted by analysts as saying Microsoft is less interested in making money in the online music business and is more interested in licensing its DRM technology and selling its 'bread and butter' - copies of Windows.

Known as a 'loss leader', the industry consensus is that while Microsoft has little control over what portable music device makers charge for their products, both Microsoft and manufacturers will be doing everything possible to sell players that are cheaper and better than the Apple iPod in an effort to eliminate the player as a threat and make money from its product nucleus - licensing and OS sales. As for player makers, their profit on players will be good enough to survive and they will probably be part of any profits from online music sales or subscriptions as well.

"Let's not forget what makes Microsoft the power they are," Joe Wilcox, senior analyst at Jupiter Research, told the Mac Observer. "It's selling Windows and making sure the technologies people want to use are available for Windows."

Mr. Wilcox agrees that Mr. Mehdi's comments were not to compare a $50 flash-based MP3 player to a $245 or more Apple iPod.

"Where the capacity of $50 device is today versus an iPod isn't even comparable," Mr. Wilcox said. "To say a $50 player will have the 'look and feel' of an iPod is ignoring the features of each device."

Mr. Wilcox even doubts that a $50 flash-based player will be available any time soon. "Looking at where prices are today for flash-based devices and looking at consumer priorities, I'm somewhat skeptical that we'll see a $50 device in six or months or so that will have mass appeal."

As for Microsoft's online music store strategy, Mr. Wilcox has doubts Microsoft can offer a model any better than what Apple is doing now with its iTunes Music Store, as Mr. Mehdi promised.

"I don't know how Microsoft can do online music searches any better than what Apple is doing today," Mr. Wilcox said. "It's so easy to find music on iTunes. Apple has created so many different avenues from links from the artist, to the song, to the album, in your library to the online store, to the billboard charts, to the iMixes, to the artist play lists. There are so many ways to find music in the iTunes Music Store.

"Apple has the simple solution. Microsoft is playing catchup. Step back from the market hype for a second. They're making it sound so good that they are going to make it easier and make the searches and synchronization easier. But where are they starting from? They are starting way back behind Apple. At best, they're playing catchup...I find his comments that if they can't have the biggest selection of online music they'll have the second best, very interesting. He's admitting that Apple is doing better."

Mr. Wilcox cautions that although Mr. Mehdi's comments sound ominous coming from a major PC player like Microsoft, the online music and portable music player market is still evolving and growing.

"This is a very small market," Mr. Wilcox commented. "Jupiter is projecting the digital download market will only be $100 million this year. In 2008, we're predicting digital downloads will only account for five percent of US music spending. This clearly shows this is a very young market with a lot of opportunity for companies to excel or to make disastrous mistakes."

Microsoft