Microsoft Says IPod Rival Zune Will Be Long, Pricey Investment

"This is not a six-month initiative, where somehow in six months we will have captured the marketplace," Microsoft Entertainment and Devices Division President Robbie Bach said Thursday. "This will be a four-, five-, six-year investment horizon."

At the company's annual financial analyst meeting in Redmond, Wash., Microsoft executives described its under-development Zune brand as a line of hardware and software for mobile entertainment, both music and video. The company has offered few details on what form or features its initial Zune devices will offer, but executives say that a wireless Internet connection will be built in.

Microsoft isn't aiming to simply recreate the iPod experience, according to Bach.

"We're not just doing Zune to copy what others have," Bach said. "We think there are real advantages to what Microsoft has to offer here."

YouTube may be as much of an inspiration to Microsoft as the iPod. Bach cited video search as an area where Microsoft hopes to differentiate itself, by enabling users to seek out and recommend to each other multimedia content. Social networking will be another focus for Microsoft, Bach said, pointing to Microsoft's experience in building the Xbox community.

Key developers from the Xbox team have been shifted to the Zune project, Microsoft CEO Steve Ballmer said in a later speech. Microsoft's dependence on their expertise forced it to hold off on initiating Zune until after it shipped Xbox 360, he said.

"I wish we'd had the capacity to do Zune a year earlier," he said.

Ballmer also acknowledged that Apple's iPod is a daunting rival.

"There's no other company -- for better or for worse -- that would be trying to get into that business at this time," he said. "Nobody else has the optimism, nobody else has the financial resources."

Microsoft executives said Zune will be a partner-friendly play; other companies will be invited to build around the Zune brand and platform. The company's current digital entertainment partner and branding program, PlaysForSure, will be unaffected by Zune's launch, Bach said.

"We're going to encourage people to continue working with PlaysForSure and the interfaces that interact with Media Player and all the technologies that are in the core platform of Windows," Bach said. "We're going to keep working with our partners on those fronts and hope that, between what we do on PlaysForSure and what we do with Zune, we can scale the Windows ecosystem."

Microsoft plans to sink hundreds of millions of dollars into building Zune over the next few years, but the investment won't be of the same pricey magnitude as its Xbox foray into console gaming. Executives projected that Microsoft's gaming division will continue to lose money this year, but will finally turn profitable in Microsoft's 2008 fiscal year. Pulled down by the cost of investments like Zune, the entertainment division is forecast to continue running in the red ink for the foreseeable future.

Zune isn't the only consumer electronics initiative that Microsoft is experimenting with. Chief Research Officer Craig Mundie used his presentation at the analyst conference to show off a variety of projects incubating in Microsoft's labs, including FonePlus, a system that aims to turn mobile phones into basic PCs.

The FonePlus demo Mundie showed featured tailored versions of Microsoft Word and Internet Explorer, allowing a phone user to tackle routine computing tasks. Cell phones are ubiquitous in developing areas PCs haven't penetrated, and Microsoft is eying FonePlus as a way to deliver its software to even inexpensive, basic mobile phones.

"This could be your first computer," Mundie said.

He cautioned, though, that FonePlus is a very early-stage initiative, not yet developed much beyond the limited prototype he demonstrated.