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FE Information Technology
Strategy shift by Microsoft to fight iPod

          Microsoft'sinterest in making its own hand-held music and video player, disclosed by entertainment industry executives this week, indicates that its old way of doing things is not working in its battle against Apple Computer's iPod.
In the PC market, its bread and butter, Microsoft has depended on hundreds of large and small computer makers that have built desktop and laptop computers running its Windows operating system.
But in some areas, Microsoft has been moving toward a go-it-alone strategy.
The models here are Apple Computer's Macintosh and iPod businesses, which combine hardware, software and online services in a user-friendly package.
Microsoft competes against Nintendoand Sonywith its Xboxvideo game console; it designed the Xbox computer chips with I.B.M.and tightly controls software distribution. And in the market for cellphone handsets, three of the four major carriers now offer phones labeled with the Microsoft Pocket PC and Smart Phone brands.
The shift, analysts said, is being driven by Microsoft's need to grab a share of markets that could grow more quickly than the PC industry, which is maturing.
"Digital media is too important to abdicate the market to Apple," said Phil Leigh, president of Inside Digital Media, a market research firm in Tampa, Fla.
Entertainment industry executives who were briefed on the Microsoft music and video player said this week that the device was equipped with a wireless Internet connection and an advanced display screen, and that the company planned to release it before the holiday season, along with an online store.
Richard Doherty, president of Envisioneering, a consumer electronics consulting firm based in Seaford, N.Y., said he had talked to several major retailers of consumer electronics in recent weeks and that Microsoft had not yet briefed them on its plans, leaving open the possibility that the company had not made a final decision to introduce its own player.
But one music industry executive said his company was told that Microsoft had made a large financial commitment to market a player this year. A senior TV network executive said that Microsoft had talked to the networks about selling their programming through the online store, but that "no deals are in place."
Introducing a player would be a distinct gamble, analysts said, fueled by the company's inability to make a dent in Apple's domination of the digital audio market with its combination of the iPod and the iTunes Music Store.
One major risk is that makers of digital music players that now use Microsoft software might feel that they faced a disadvantage if Microsoft's player were more directly integrated with a Microsoft music service and offered exclusive features.
The company's major hardware partners, including iRiverInc., Creative Technology Ltd.and Samsung, might break with Microsoft and team up with a competitor like RealNetworks Inc., the music and video service provider, making Microsoft's task all the more difficult.
"These guys put an awful lot of sweat into making the hardware right," Mr. Doherty said. The partners could see a competing player from Microsoft "as a bit of a betrayal," he said.
Nevertheless, Microsoft may have decided that it has no alternative in the face of its inability to break Apple's stranglehold while using the old PC industry model.
Music and video may be so crucial to how computers are used in the future - a potentially big source of new growth in software and hardware sales - that Microsoft cannot strategically afford to let Apple continue to hold the upper hand.
Mr. Leigh of Inside Digital Media said Microsoft's shift reflected its impatience with the PC model. "From Microsoft's point of view, they have waited long enough," he said. "The rest of the Microsoft ecosystem has not done the job. If the Microsoft ecosystem cannot compete effectively with Apple, it's a real problem for Microsoft."
According to one product designer - who has close ties to several consumer electronics manufacturers and insisted on anonymity because of his business relationship with one of those companies - at least one of the leading makers of digital audio players has already approached Microsoft to ask it to clarify its strategy.
A spokeswoman for Samsung said the firm would not comment on the Microsoft media player reports. Creative Labs and iRiver executives did not return phone calls on Thursday.
If Microsoft does decide to challenge the iPod directly, it may try to gain an advantage by creating a player that matches Apple's ease of use but, unlike current iPod models, is not dependent on a personal computer.
Today, almost all media players must be connected to a PC to transfer files. But several start-up firms, including Music Gremlin and Zing, are now offering or developing services that are built around players with wireless capabilities.
A person who works closely with one of the music labels said that the Microsoft device would permit users to play songs wirelessly from other Microsoft players in the vicinity. Users could "tag" music that looked interesting and then play it one or more times without paying for it, this person said, adding that the exact terms of the music rights had yet to be worked out.
A consumer electronics software developer said another feature that may make the device easier to use is at the heart of Microsoft's recently released Windows Media Player 11 software: a highly compressed database of song information with pointers to millions of tracks stored online. This database on a wireless portable player could make it much easier to search for new music.
A device that plays video would most likely require a hard drive for storage. The technological risk is that Microsoft would be entering the market with a relatively bulky device, just when Apple has been moving to slim music players with flash memory like the Nano that are more durable and have longer battery life.
Apple is reported to have a wireless version of the iPod waiting in the
wings, and it is also said to be close to introducing a version with a touch screen. Those bits of consumer polish might outshine Microsoft just as it was entering the business with its own hardware.


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