Microsoft: Zune sales to top 1 million by June

The software maker said Wednesday it was pleased with response to the device, which debuted at No. 2 in research firm NPD's weekly sales ranks, but fell to No. 5 last week.

"We're forecasting just over 1 million units for the fiscal year," said Jason Reindorp, marketing director for Zune at Microsoft. "We feel pretty good about that number."

The Zune went on sale in mid-November. In its first days, it ranked near the top of Amazon.com's electronics sales chart. According to NPD's recent ratings, though, it now holds about a 2 percent market share.

Reindorp said sales have been going "pretty well" and are "pretty much on track" with the company's initial forecast. "Microsoft has a very realistic view of the landscape," he said. "There wasn't any foolish thought of coming in and turning the whole market around."

IDC analyst Susan Kevorkian said that the company's projections are similar to her estimates. "We think that Microsoft had relatively modest expectations in terms of unit shipments and sales going into the Zune launch."

Kevorkian said that she expects Microsoft to have sold about a half-million of the devices by the end of December. As a point of comparison, research firm IDC forecasts that there will be 21.5 million hard drive-based music players sold this year, the vast majority from Apple Computer. Microsoft estimates that its better than 1 million devices will give the company about a 10 percent to 15 percent share of the market for music players with 30GB or more of storage. The company also projects that Apple and Zune combined will have 98 percent of that market.

Song sales
Beyond the device itself, Microsoft wouldn't say how many music tracks it has sold through the Zune Marketplace or say how many paid subscriptions to the Zune Pass music service it has sold. However, Reindorp did say that the company has not been heavily promoting the subscription option.

"We're being even more realistic with the Zune Pass," Reindorp said. "Our numbers are really small."

The company said it is seeing a gap between the number of devices that are being sold at retail and the amount that have been hooked up to a PC and activated.

"We think a lot of Zunes are sitting underneath Christmas trees," Reindorp said.

Microsoft tried for years to rival Apple's iPod by offering an underlying media technology that could be used by a variety of music services and devices. However, Microsoft and the industry struggled with compatibility and simplicity. Microsoft decided earlier this year to go it alone with Zune.

The software maker announced plans for the Zune in July, saying the device would stand out from the iPod through a built-in Wi-Fi connection. Although it eventually plans a family of devices, Microsoft opted to start in the U.S. with only a single 30GB device, though it does come in three colors.

The biggest surprise, if any, has been the demand for the brown version of the player. Although resellers generally haven't had trouble keeping any of the Zune models in stock, where there have been occasional supply issues, they have been with the brown model.

"Some (retailers) are surprised how well brown is doing," Reindorp said. "Brown is definitely a polarizing color. You either love it or you hate it."

Software fix coming
Microsoft is also readying its first software update for the Zune. The update will allow the Zune to work with Windows Vista, Microsoft's just-finished operating system, which is now available to businesses and goes on sale to consumers in January.

The Zune software update, which is expected before Christmas, will fix some minor glitches and add some performance and other improvements, Microsoft said. The company won't include major new features in the release, however.

"It is plumbing stuff, but it is stuff customers will notice and appreciate," Reindorp said. "It's not going to be a whole new wireless scenario or anything like that."

But the real question is what Microsoft will do, over time, to expand and improve on its first Zune.

"We'll do more things," Chairman Bill Gates said in an interview last month. "But, you know, we're vague and mysterious about what that is. I mean, but we're not just going to do media; we'll do more."

One thing that analyst Kevorkian expects to see is the addition of video content to Microsoft's online Zune Marketplace. That could take several forms, she said. "Microsoft has some interesting options in terms of offering both user-created and professionally produced video," she said.

The company recently started selling TV shows and movies for download to its Xbox game console. It has also been testing MSN Soapbox, a Web site for user-generated video.

Jupiter Research analyst Michael Gartenberg said that Microsoft needs to play catch-up in other areas, such as support for podcasting and video content. It should also expand beyond a device based on a single hard drive--perhaps moving into a flash memory-based player.

"There is no flash Zune at a time when the (iPod) Nano is just flying off the shelves," he said. "Those are the things they are going to have to address in 2007 if they are going to be a credible player."

Kevorkian said that Microsoft also needs to expand how the Zune's Wi-Fi can be used, probably to allow a direct connection for downloading music from Microsoft directly to the Zune. Gartenberg notes, however, that such a connection is tricky to engineer in a way that is still easy to use on a device that has no keyboard.

Microsoft has said it expects to spend hundreds of millions of dollars over the next few years to develop and market the Zune. "We expect them to devote substantial resources over the long term to carve out a niche for Zune in the portable media player market," Kevorkian said.

In an earlier interview with CNET News.com, Microsoft CEO Steve Ballmer acknowledged that despite the company's satisfaction with the way things are going with Zune, it still has a lot to do.

"We think we have a great initial proposition, and we're happy with the initial response," Ballmer said. "But we don't fool ourselves. There's a guy who's got a lot of share, and we're coming later in the day...So we have our work cut out."