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Zune barely registers on Microsoft's financials

Microsoft has reached its goal of shipping one million Zunes to retailers. Now what?

On Microsoft's fourth-quarter earnings call yesterday, the company noted that it had reached its goal of shipping one million Zunes to retailers by June 30. (I don't know why Microsoft's fiscal year ends June 30, but it's always been that way.)

Looking at the Entertainment and Devices (E&D) section of the accompanying financial release, one can derive that the combination of Zune, consumer hardware (keyboards and mice), consumer software (Office for the Mac, Encarta, and so on), and TV platforms (Microsoft IPTV) earned about $315 million during the quarter. Microsoft doesn't break down its numbers any farther than that. However, in the past, the company has said that consumer software has been over $1 billion per year (although it probably fluctuates a lot, spiking around back-to-school and Christmas), and I know that keyboards and mice has been a profitable business for a long time and makes up a big chunk. So it's safe to bet that the Zune was a tiny blip--less than $100 million--in the revenue of Microsoft's E&D division (total revenue: $1.16 billion, mostly from Xbox and games), and a mere rounding error in the company's overall quarterly revenue ($13.37 billion).

Looking at it a different way: if Microsoft actually sold all those Zunes--and remember, the number's just shipped to retailers, not sold to consumers--at between $300 and $350 apiece, that would mean revenue of between $300 million and $350 million for the fiscal year. Microsoft's total revenue for the fiscal year was more than $50 billion. Windows alone took in close to $15 billion.

It's true that the Zune is a new product going up against an entrenched competitor. So let's compare it with the first Xbox, which was released almost exactly five years before the Zune, and went up against an equally dominant competitor, Sony's PlayStation 2. The first Xbox sold 1.5 million units in its first six weeks on the market, and nearly 4 million by the end of that Microsoft fiscal year. Am I comparing apples to oranges? Perhaps. But the overall unit sales for portable music players are much higher than for game consoles--Apple, for instance, sold more than 21 million iPods in its last quarter (which ended Mar. 31). I don't think any game console's sold 21 million units in a quarter, although I haven't checked every Sony sales quarter in history. In other words, Zune is carving out a much smaller chunk of a significantly larger market.

My point isn't to denigrate the Zune or the people working on that product. But the iPod is critical to Apple's business. The Zune is practically irrelevant to Microsoft's business. So how long will Microsoft continue to invest in it? I assume they'll announce new SKUs and perhaps a feature update in September. But if sales don't pick up in holiday 2007, the writing could be on the wall.

UPDATE: Cesar Menendez, a marketing manager on the Zune team, informs the worldthat the company actually sold in 1.2 million Zunes. A slightly larger drop in the bucket, then.