By David Worthington | Thursday, July 30, 2009 at 9:49 pm
MarketWatch published a story today that could light a fire under Microsoft’s shareholders: it all but wrote an obituary for the company’s Zune portable media player. However, I do not think that the Zune is on the chopping block–yet.
Sales for the Zune dropped 42% over the last quarter to $211 million, according to Microsoft’s Q4 financial reports. In comparison, Apple iPod sales declined just 11%, for total sales of $1.5 billion, MarketWatch reports.
In terms of market share, the best-case scenario cited in the report was an IDC survey from last fall that found that the Zune holds 4.8% of the market. Recent numbers for the NPD group lower that estimate to a dismal 2%, compared to 70% for the iPod.
Microsoft is expected to ship the Zune HD, a touch screen interface device that offers high-def video output and radio, in the fall. Sales will likely continue to falter until then.
What’s more, the Zune barely registers on Microsoft’s income statement: It only account for 2% of the company’s total sales revenues, the report noted. While Microsoft is still profitable, its Q4 earnings were significantly lower than last year, and investors may not have patience for failed projects that fall outside of its core business.
Indeed, Microsoft may need to face up to reality. An analysts quoted in the MarketWatch report said that many retailers have stopped carrying the device altogether. “If Zune were going to make a strong move against the iPod, it already would have,” IDC analyst Susan Kevorkian told Market Watch. Ouch.
Apple also “outflanked” Microsoft by shifting its customers to higher margin products, such as the iPhone, George Kurian, a vice president at Tradition Capital Management said.
He suggested that Microsoft abandon Zune and purchase Palm’s Pre to compete against Apple in the high-growth smart phone category. Microsoft was rumored to be working on a Zune phone, but is instead working on reference designs that its partners can use to build devices that will be able to access Zune branded services.
What Microsoft’s shareholders think is another story altogether. The company has been widely panned for underperforming against the market over the past decade, and for its failed consumer initiatives.
Despite its performance, it has yet to face a shareholder’s revolt. Investors have been infinitely patient with management’s attempt to diversify Microsoft, and management always gets a lot of leeway (and money) to experiment.
Microsoft will have to eventually justify its Zune business. If the HD does not fly off the shelves when the company opens its stores in the fall, bypassing retailers, patience may finally wear thin. Then it might have to decide whether the Zune is worth the effort.