It doesn’t take an economics professor to realize that Microsoft’s Zune has been in trouble – arguably “doomed” – since it launched. Without falling back on simple rhetoric like, “no one – especially Microsoft – can stop the iPod,” it pretty much went without saying that the company had next to zero chance of toppling Apple with a chunkier, same-priced device that offered only minor feature advantages over a 30GB iPod, and numerous disadvantages. As the market leader, Apple established a demand curve that looked (very) roughly like this:
In other words, the lower the iPod’s entry price went, reaching a minimum of $69 when the first-generation iPod shuffle was around, the better the chance Apple could reach 100+ million iPods sold. Incidentally, it did so recently without any apparent fanfare. In even approaching that level, the iPod made it really hard for any competitor to even dream of comparable sales, and it seemed almost laughable that Microsoft could even sell 1 million of them in its first year. At a price of $250, the company wasn’t even able to get every member of Best Buy’s Geek Squad to buy them, and to be honest, even though we considered buying one to review on iLounge, we figured that it wasn’t even worth the effort of doing so. With the exception of Zune blogs and a couple of gadget sites (go take a look back), Microsoft couldn’t even squeeze really positive comments out of the people who got them for free.
Part of the issue is that the total number of people who would want to buy Zunes in an iPod-dominated world isn’t all that huge. Even if you add up all the iPod protesters, Apple haters, Microsoft viral marketers, and hard core techies, you’re not anywhere near the 100 million mark. As the second graph suggests, Microsoft’s catering not to the mainstream, but rather vocal protesters and curiosity seekers. So on one hand, it knows it’s not going to rival the sales of the iPod even if it lowers its entry price, but clearly, lowering the price will help. And it has a shot at, say, 20% of the market if it is willing to literally give Zunes away to people – or something similar.
According to a report in Computerworld, Microsoft’s considering just giving people Zunes if they’re willing to pay for a monthly subscription to a Microsoft music store. They’ll presumably fill the Zune with as much music as you want every month, so long as you keep on paying the service fee. This could take on two flavors: stop paying after a certain number of months and you have no music, and probably no Zune. Or, you’ll have to commit to paying long enough so that you’re guaranteed to keep the Zune.
For a company in Microsoft’s position, this strategy would make sense. It could build Zune marketshare, put some money into the record labels’ pockets, and actually circulate some Microsoft-DRMed music – the DRM’s required to keep people from sharing entire rented libraries with their friends. Of course, it would also establish Zune at an apparently attractive ZunePass entry price point of $15, which smaller print would explain would be recurring for 12 or 18 months. By the end, you’d still be paying $200 or so for the Zune, but you’d be doing it in easier-to-digest installments, and enjoying the temporary use of music in the meanwhile.
Speaking for myself, I’ve never been a fan of the rent-to-own concept – either personally or as a business model – but there’s something to be said for the ability to attract people with a low price, particularly if the price includes not just hardware, but also enough content to fill the device for the duration of the payment term. The big problem, of course, is that renting music would leave you without anything to listen to at the end of the agreement: it’s really just a lure to keep you renting more music, and paying more fees. Would that stop people if Microsoft offered such a plan, or would some actually prefer this model? Personal feelings aside, I’d have to guess the latter.
Even without a subscription plan of its own, Apple could easily counter such an initiative by offering financing (“or as low as $5 a month,” as mocked up above) on iPods, but then, perhaps it won’t have to. Zunes might be so tarnished at this point that Microsoft couldn’t win marketshare by even appearing to give them away – even if they’re offered in new colors, as is the current rumor. What do you think?