• by Laurie Sullivan  @lauriesullivan, October 4, 2007

Wall Street analysts are scratching their heads over a conundrum: How will Microsoft convince consumers that it's much more fashionable to go to the gym with a Microsoft Zune digital music player, rather than an Apple iPod, in time for the holiday buying season?

Microsoft unveiled a second generation of the Zune digital music player late Tuesday night, complete with social network site, downloadable TV content, FM tuner, Wi-Fi options, and more. But if sales rely on branding efforts, Microsoft's will surely lose the race.

So far, Microsoft has sold 1.2 million Zunes between the November release and June, which is less than 3% of iPod sales during the same time period.

Apparently, analysts believe that Microsoft has done little during the past 10 months since the product launch to market and create brand awareness to set Zune apart from Apple's iPod, Creative Labs' Zen, SanDisk's Sansa, or Sony's Walkman.

"Microsoft isn't a marketing-savvy company, as some might think," says Trip Chowdhry, an analyst at Global Equities Research. "Matter of fact, they are dumb. It appears that high-school dropouts head marketing for Zune."

Consumers have divided the portable music device market into two categories--iPod and others. Chowdhry says Zune fits into the "others" category, which relies on price and variety to compete profitably. Fighting that battle won't bring Microsoft success.

Microsoft will try to change that. As the holiday season approaches, the company plans to aggressively step up marketing and advertising efforts, according to a Microsoft spokesman, who declined to offer details at this time.

Apple's iPod remains the dominant platform, partly because Microsoft failed to offer consumers variety in styles, colors and functions right out of the gate. The new models come in black, green, red and pink. They have a Wi-Fi connection option to automatically sync audio clips, music, photos and video with home computers on wireless networks.

The device now relies on flash memory, compared with the earlier hard-drive model that reads information from a spinning disk. Other changes include nixing the three-day rule. The device now deletes shared songs after three plays. The Zune Marketplace will begin selling music videos. There are also plans to add a social network.

The smaller versions of the Zune media player that go on sale mid-November--at $149 for a 4-gigabyte device, $199 for an 8-gigabyte model, and sleek black 80-gigabyte model for $249--put Microsoft in the right direction, says Charles Di Bona, senior research analyst at Sanford C. Bernstein & Co. "Apple's brand dominance in the portable music space makes it difficult for any company trying to sell portable music devices," Di Bona says. "The name Apple has become synonymous with music players, similar to shipping and FedExing things."

Branding, of course, promotes consumer adoption. Even with the video consoles Xbox 360, games like "Halo 3," and Internet protocol television (IPTV) offering introduced earlier this year, Microsoft still lacks the cool factor among consumers, analysts say.

The loudest grumbling heard from analysts suggests that Microsoft's consumer products have a me-too look, which hurts companies trying to redefine a market. Long-term, Zune has the potential to take market share, but it typically takes Microsoft three product iterations to break into a new market, says Alan Davis, senior research analyst at D.A. Davidson & Co.

Microsoft should have the advantage. It dominates in sales of computer operating systems. "Apple's done a great job with their Mac ads of framing Microsoft as this nerdy business software company, and it's something they have to overcome," Davis says. "It's Microsoft's uphill battle in marketing."