What Microsoft REALLY Said About its Music Strategy & iPod

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 donit 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 Sachsi fifth annual Internet Conference in Las Vegas, Nevada on Wednesday. In his remarks, Mr. Mehdi discussed his companyis 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 itis 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 iJanusi. 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, Appleis Fairplay DRM is not based on a subscription model, but rather a per-song model of buying each track. FairPlay works only with Appleis 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 didnit 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 iPodis a great product, but thereis a lot of opportunities. Theyire only in four percent of US homes today, even with all the success theyive 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, weill have a device that will be available to the consumer. We wonit produce it, but it will be available to the consumer...And then weill 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 Microsoftis 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 itis been okay that weive taken some time (to launch our service), because Iim not sure any of the other ones out there have done anything of note. Weire taking our time. Weire 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 thatis the part that is sort of untapped and a big opportunity. That will be coming out later this year. We think itis 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, weill have a very broad selection of music. My goal is that if we donit have the broadest selection, weire tied for the broadest selection of music. Weill have the best discovery (of songs), itill 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. Mehdiis 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 ibread and butteri - copies of Windows.

Known as a iloss leaderi, 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.

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

Mr. Wilcox agrees that Mr. Mehdiis 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 isnit even comparable," Mr. Wilcox said. "To say a $50 player will have the ilook and feeli 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, Iim somewhat skeptical that weill see a $50 device in six or months or so that will have mass appeal."

As for Microsoftis 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 donit know how Microsoft can do online music searches any better than what Apple is doing today," Mr. Wilcox said. "Itis 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. Theyire 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, theyire playing catchup...I find his comments that if they canit have the biggest selection of online music theyill have the second best, very interesting. Heis admitting that Apple is doing better."

Mr. Wilcox cautions that although Mr. Mehdiis 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, weire 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."

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