Open challenge to Microsoft's Robbie Bach: If Zune is #2 after X-Mas, I'll shave my head

This is Microsoft's chance to get even with me for anything I've written that it doesn't agree with. It's all in good fun (which we need more of in this industry) and it's a great way to exhibit how passionate if not disputatious journalists and vendors are when it comes to backing their sometimes irreconcilable positions and opinions. One thing I can say about Microsoft: Of all the companies in the industry that I have dealt with in my entire career, its spokespeople and executives stand above the rest in not taking things personally (I wish I could say the same for other companies). In fact quite the opposite. It seems as though you could call Bill Gates the Devil, and its representatives will just keep coming back and coming back in hopes of changing your mind. I've always admired this about Microsoft and its people. They're always up for a good debate and hopefully, this case is no different.

I just read-to-the-end Bloomberg's report on Microsoft's Zune 2 which notes some interesting marketshare data (Apple #1 at 71 percent, Microsoft #4 at 3 percent). The story has some noteworthy quotes. The first is of Robbie Bach (president of the Microsoft division that includes Zune) boasting that Zune will be in 2nd place in terms of market share by the time Christmas is over:

"When we're done with the holiday, people will look and say, 'There's Apple and there's Microsoft'," he said. "The reality of the numerics are that Apple will still be No. 1.''

Zunes moving into second behind the iPods?

Robbie, we've known each other since the early 90's when you were on the Office team. It's been a while since we last spoke. So, how about we rekindle that dialog with a friendly and fun challenge?

As long as you're referring to units sold by Christmas 2007 and NPD Group's aggregated market share numbers for all (flash and hard drive-based) digital media players (the basis of the market share data cited in the Bloomberg story) , I will shave my head on the stage of your choice if Zune is in second place according to NPD's first post-holiday report on marketshare (my wife is going to kill me when she finds out). The quid pro quo is that you must shave your head on the stage of my choice if it's not (I'll even provide a licensed hair stylist).

The NPD Group issues fairly accurate numbers weekly (more accurate monthly) and says the final holiday numbers should be available by CES in January (seems like a great stage for some head shaving!). As a side note, I would have offered this challenge to J. Allard (corporate VP over Zune). But according to his picture (shown here), his head is already shaved. Meanwhile, Bach appears to have as much to lose as I do.

Here's why I'm pretty confident I'll win. The Bloomberg story doesn't say who is #2 and #3. Had Bach said that Zune will move into 3rd place, I wouldn't be issuing this challenge. According a Sept 11, 2007 report by Forbes' Louis Hau, Creative Technology (makers of the Zen) is in 3rd place with a 4 percent share of the overall digital media player market. Microsoft could easily slide ahead of Creative without breaking a sweat. But overtaking #2 by the end of the year ain't gonna happen. Coming in at #2 with 10 percent of the market (and growing according to that Forbes story) is Sandisk, makers of the Sansa Connect (see my video interview of Sandisk spokesperson Carm Lyman from earlier this year).

Responding to my inquiry this morning, Sandisk's Audio & Video Business Unit senior VP and GM Daniel Schreiber said:

"We understand Robbie Bach's aspiration to be #2 - it's a nice place to be. We don't take our #2 position take it for granted. Our approach has been to offer the consumer a compelling set of Sansa products, and the market share has taken care of itself."

What would it take for Bach to achieve this goal?

On first blush, it looks as though Microsoft must more than triple its sales of Zune by the time the holidays are over if it is to overtake Sandisk. But that's actually not the case. If for example, Microsoft adds 3.1 percentage points to its share and all of those points come out of Sandisk's share (in otherwords, would-be Sandisk buyers opt for a Zune instead), then Microsoft ends up at 7.1 percent share and Sandisk at 6.9 percent. Perhaps now you know why, as many of the reports are saying, Microsoft's new Zunes are practically carbon copies of the latest iPods to come from Apple. If Apple has the so-called winning formula, then, maybe the best way to take share away from the #2 Sandisk is to offer something that's almost exactly the same as what #1 Apple is offering. This would be like if Pepsi was in 4th place behind the #1 Coca-Cola and the company figured out that the best way to move into 2nd place was to copy Coke's recipe.

Also in Microsoft's favor is Zune's past performance. On first blush, it looks like Microsoft is in 4th place with a lot of ground to make up. But upon closer inspection, Microsoft has actually done pretty well in the niche it first went after with Zune: hard drive-based portable media players. In a phone interview earlier today with NPD Group director of industry analysis Ross Rubin, I learned that Microsoft was able to move very quickly into 2nd place in the hard drive-based portable media player market with Zune capturing a 10 percent share. At the time (and even currently), Microsoft didn't even have a flash-based offering in the market the way Apple, Sandisk, and Creative do. If history is any indicator, then perhaps Zune 2.0, which represents Microsoft's first foray into flash-based portable media players can also capture 10 percent of the market. If just a shred of that is at Sandisk's expense and Microsoft holds steady with 10 percent of the hard disk-based player market, Microsoft will be comfortably in 2nd place.

So, why am I so confident I won't be shaving my head? Here are the major bulletpoints:

• First, even though the first Zunes weren't out until late into the 2006 holiday season and still managed a respectable 10 percent share of the hard drive-based portable digital media player market, Microsoft's newest Zunes will once again not hit shelves until November. This works against the company's chances of winning a battle with Sandisk.
• Much the same way Microsoft's success so far is based on participation in the hard-drive segment only, Sandisk's success is also based on its participation in just one segement. Only in Sandisk's case, it's the flash segment which, according to NPD's Rubin, is the the larger of the two segments (60-70 percent of all portable digital media players sold are flash-based). Microsoft may strengthen its hand by doing both hard disk and flash-based players. But, upon closer inspection, the MSRP for its lowest priced player (the 4G Zune 2) is $149. One problem for Microsoft is that when the holidays role around, there's a huge segment of the flash player gift giving market that's looking for more of a value-buy in the sub-$100 range where Microsoft has no offering and, come November, Sandisk will have several (like the new 2GB Clip at $60, replete with FM radio and the 1GB Shaker, recently repriced at $40). For Microsoft to even have a shot at 2nd place, it will have to come out with some value-offerings as complements to its $150 4GB and $200 8GB models. Even Apple has a value offering in the market (the $79 Shuffle).
• Sandisk's exclusive participation in the flash segment is no accident. Sandisk's core business is the flash memory business. This means that, as a manufacturer of flash-based media players, Sandisk has access to better pricing on flash memory than most other media player manufacturers which in turn means that Sandisk gets to be very price competitive in the market. How price competitive? For $150, you can get a 4GB Zune 2 with an FM radio that can play music and videos on a 1.8" 320x240 pixel display. For that same $150, you can buy an 8GB Sansa View (that's double the memory) with an FM radio that can play music and videos on a 2.4" 320x240 display and for extra good measure, the View includes a micro-Secure Digital slot that support the new high capacity version of microSD known as microSDHC. In other words, as microSDHC cards ramp to 8GB over the coming years, the View offers some investment protection that the Zune does not.

Bear in mind that I'm not even taking into consideration the flip-side of the Coke/Pepsi argument whereby, give the choice of two things the same (Apple's iPods vs. the new Zunes), people might end up picking the iPod in which case the Zune ends up being a complete dud. In other words, by going so head-to-head against Apple, Microsoft strategy may actually backfire in terms of competing with Sandisk.

So far, the consensus in the blogosphere is that Zune is not sufficiently differentiated in function or price from Apple's offerings to warrant a "style-override." Not part of the discussion so far is the role that style plays in this purchase. I've written about this many times before. Apple knows how to make MP3 players into a fashion buy. Just look at what the hipster on any Apple billboard is holding. It's not an actual iPod. It's a white rectangle with some gray on it and always has been. To the extent that Microsoft has not figured out how to turn Zune into the fashion play that the iPod is, it is going to have a tough time winning buyers if, on core features and price, the Zune and the iPod are locked in a dead heat. At the end of the aforementioned Bloomberg story, JupiterResearch's Michael Gartenberg said it better than I could:

"Microsoft's technology is pretty good.....The challenge is marketing, so that you can be seen using a Zune and not have to hide in a corner.''

Granted, I'm giving no consideration to some of Zune's other features like the new Zune Social service and WiFi-based sharing. That's also the reason I didn't compare the new Zune to Sandisk's identically priced Sansa Connect which some may argue is the fairer comparison because both have WiFi and a "see what your friends are listening to" feature (perhaps proving that Sandisk's participation in the flash memory market isn't as much of a manufacturing advantage as Sandisk would lead you to believe). That said, the Connect's WiFi feature supports Yahoo's LAUNCHcast Internet Radio, music sharing without the three-play limitation that Zune's sharing option involves (though not with certain Yahoo-acquired content), and direct connectivity to Yahoo's Flickr service for photo viewing (meaning there's arguably more value in Sandisk's implementation). Like the View, the Connect also has an SDHC slot to expand its memory.

But, come the holiday season when Microsoft's Bach expects Microsoft to pass Sandisk, I really don't see WiFi and the social stuff as being checkbox items on a gift giver's criteria list as much as the flagship criteria (price, capacity, display size, and expandability) where Sandisk looks like it will be the hands-down winner. So much so that I know I want one of the Sandisk offerings (the Connect or the View) for Christmas. I'm just not sure which one.

So, Robbie, are you game? [Update 10/3/2007:  This offer expires on Oct 31 2007 and is good so long as the announced product lineup and pricing does not change].