Analyst: iPod Tough Competition for Zune

by , 11:10 AM EDT, September 29th, 2006

Microsoft's Zune media player offers similar features to Apple's iPod, and now will debut with a similar price tag, too. But that may not be enough to draw away iPod users, according to American Technology Research analyst Shaw Wu.

Mr. Wu comments "To us, the key question is whether Zune priced in-line with a vPod will take share with its bulkier form factor, same Windows UI and software currently available from 15-20 vendors, and inferior battery life."

The Zune player will likely see some success thanks to Microsoft's strong brand, but will lose money on each unit sold. Mr. Wu figures Microsoft is losing about US$50 on each player sold now that it lowered the price to $249.99 to compete with Apple's 30GB enhanced fifth generation iPod.

"We believe Microsoft not pricing lower demonstrates Apple's under-appreciated scale and supply chain strength where Microsoft will lose money (we estimate about $50 per Zune) vs. Apple's industry-leading iPod profitability in what we estimate to be an 18-22 percent gross margin and 8-11 percent operating margin," he said.

Microsoft won't be the only company to lose money thanks to the Zune. Companies like Creative, Sony, iRiver and Samsung will likely suffer from lower sales after the Zune hits store shelves.

Mr. Wu is maintaining his "Buy" rating and $91 target price for Apple stock. Apple is currently trading at $77.10, up 0.09 (0.12%).