It's been three weeks since the launch of the MP3 player, which Microsoft is marketing for its "social" ability to share tunes wirelessly. The Zune hardware has drawn some strong reviews, but the actual music downloading process has received less enthusiastic marks in comparison to Apple's market-dominating iPod and iTunes.
In its first week, Zune managed to grab a 9 percent unit share for sales, making it the No. 2 seller in the portable digital player category as measured by the NPD Group. Since then, it has slipped to the No. 5 spot in the category.
In response to the NPD data, Microsoft said in a statement that it's not focusing on week-over-week numbers--but rather on how Zune generates incremental sales and expands the category.
"This is reiterated by our retailer partners who report that Zune is doing more than nibbling at our competitors' share," Microsoft stated. "Zune is contributing to increased interest in digital music players."
"At this point, the brand consumers care about is iPod. That's what they're interested in, and that's not changing anytime soon," said Michael Gartenberg, an analyst with JupiterResearch.
"Brand recognition is not going to be prevalent for Zune this holiday season," said Ross Rubin, Director of Industry Analysis for NPD Group. "The majority of the market at this point is the Flash-based players like the iPod Nano and the SanDisk players. They're also priced a bit lower, which makes them a little friendlier for gift-giving."
Microsoft is working with vendors to develop a stable of accessories to broaden the Zune portfolio. Rubin said Microsoft will introduce a Flash-based player in 2007.
"Microsoft needs to think beyond the holiday to drive the market to find where Apple isn't, and see what differentiation they can offer to get people to consider a Zune instead of an iPod," Gartenberg said.
Microsoft is in the MP3 market for the long haul. While consumers may not have developed much of a brand association with the Zune yet beyond the $100 million "the social" campaign by Universal McCann and 72and Sunny, Microsoft has said it is committed to building the Zune brand over the next five years, just as it did with the Xbox.
"Microsoft will spend hundreds of millions of dollars over the next five years to catch up to Apple. In many ways it's a classic Microsoft launch strategy against a market leader against whom they don't match up on a head-to-head basis," said NPD's Rubin.