Microsoft’s new entertainment strategy: Use Xbox to save Zune

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Microsoft’s entertainment strategy has always resembled a lopsided table. Supporting one end is the Xbox 360, a successful (if not quite a phenomenon like the Wii) video game system that has sold about 30 million units worldwide and firmly established itself as an industry force since the brand launched in 2001. Propping up the other, shorter, side is Microsoft’s portable music and video player, the Zune. It launched in late 2006 and has sold just 3 million units (in the U.S. and Canada only; Zune is not yet available in other countries). That is equal to about 27% of the iPods Apple sold last quarter alone. In fact, Apple sold 3.79 million iPhones last quarter, and those things come with a pricey service contract. Zune is, to put it bluntly, a flop.

But Microsoft doesn’t give up on struggling products easily (try logging on to MSN; it’s still there). Before the Zune launched in 2006, president of entertainment and devices Robbie Bach said it represented a ‘three-, four-, five-year investment horizon,’ and apparently he meant it. This fall, Microsoft is giving it another go with the third iteration of the gadget, Zune HD (pictured), which essentially matches the iPod Touch feature-for-feature and adds a high-definition radio receiver.

Playing catch-up with Apple isn’t going to cut it, and Microsoft surely knows it. Which is why the really interesting play is its decision to integrate the Zune digital media store (its version of iTunes) onto the Xbox 360. The 17 million-plus owners of the console who log on to its Xbox Live Internet service will get access to all of Zune’s music and video content via a prominent logo on the main menu.

Microsoft didn’t explain exactly how this will work — it’s saving the details for the E3 conference next week — but the implications are obvious: Download music or TV shows and play them on an Xbox 360 or a Zune. Regardless of which device you use, there’s one brand for downloading content on any entertainment device from the tech giant, and that is Zune. (The exception may be movie downloads, which might very well remain restricted to the Xbox for now due to rights issues.)

No doubt Microsoft will position this as a better value for consumers’ digital media dollar. But strategically speaking, it’s classic piggybacking: Put the struggling brand front and center on the successful one. If 17 million Xbox Live users notice the Zune logo every time they log on, a fraction of them start downloading videos and music, and a fraction of those people are convinced to buy a Zune so they can take the content with them on the go, Microsoft’s entertainment table might become a little more balanced.

— Ben Fritz

Picture: Zune HD. Credit: Microsoft.