Microsoft (MSFT): Kill The Zune

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Microsoft (MSFT) is about to launch its latest version of the Zune multimedia player. To date the company has sold two million units. In contrast, Apple (AAPL) has sold over 150 million iPods.

Microsoft has a chance to kill the Zune with a good excuse. By cutting prices on its Xbox 360 last week, it is putting pressure on the margins of its "devices" division.

In its last fiscal year, Microsoft made a little more than $400 million on revenue of $8.1 billion in the part of the company that makes and markets hardware. Those numbers seem OK, but in the two previous years the unit lost $2.5 billion. Wall St. hates the business almost as much as it hates Microsoft’s MSN online operation. Investors want the company out of areas where it looses money and has few prospects for improvement.

The Xbox 360 price cut is a sensible risk. If dropping the cost of the product picks up market share from Sony and Nintendo, the move has the benefit of moving Microsoft further along in an area where it is doing well.

The Zune is another matter. Apple’s lead is too large. The Zune is not a product which is terribly different from its competition.

Microsoft can simply say it does not want to take a bath on the Zune while it is taking a more intelligent risk with Xbox profitability.

Kill the Zune. Save some money.

Douglas A. McIntyre