Fast Follower Product Strategy: Microsoft Zune

gorilla
Microsoft has a product called Zune that is a competitor to the Apple iPod. They just recently announced their second release – the new version of the Zune. Since Apple already dominates that market, Microsoft qualifies as a follower – how are they approaching the introduction of a new product to compete with an 800 lb. gorilla?

The iPod Product Family

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There are several different iPods in the market, each targeting a different subset of the mobile entertainment market. Apple has audio and video players with different form factors, designed for different usage patterns. Those different designs have resulted in a feature-based market segmentation. That isn’t really a good way to think about the market – you should think about how the devices are used, not how many songs they hold. Nonetheless, when measuring the market, people look at the features as a means to segment.

Microsoft’s Early Approach

The product manager for Zune gave an interview on Windows Weekly – a TWiT network podcast with Paul Thurrott – several months ago. The product manager mentioned that they were targeting the Zune to achieve 10% of the 30 GB audio player market. I may be mis-remembering the details, but at the time I thought it was an oddly narrow target. The product manager wouldn’t talk in much detail, understandably, about the upcoming features that were planned for the next Zune. In the interview, they discussed how quickly the Zune came out.

At the time, I thought “OK, we’ll see what they have for the next Zune,” and I moved on.

The New Zune

zune

The second generation of the Zune was just released, with new models and features. I read a commentary somewhere that said you’ll recognize the pricing model, because it is the same as the iPod. The Zune has models that are competitively priced with the iPod Classic products.

Tom Merritt, on Buzz Out Loud, commented that he understands the Zune strategy – first, come out with a player that is not as good as an iPod – then in the next release, make it “just as good” as the iPod. The third release will be better than the iPod, and the fourth one will be an iPod killer. He argued that Microsoft used a similar approach with Internet Explorer. Tom’s comments caused me to remember the earlier interview with the Zune’s product manager.

A Good Strategy?

This may be an excellent strategy. The ultimate success of the Zune will probably be influenced more by Microsoft’s ability to market the product than the relative merits of the Zune when compared with the iPod – but we can still learn from it. Here’s a generalized recipe that can be extracted from what Microsoft has done. Keep in mind that this is a strategy for entering a red ocean market, already dominated by a market leader.

  1. First, segment the market. Pick one segment, and deliver a product that has only the must have features for that segment. This is your first release
  2. Second, improve the product, delivering enough more is better features, and some surprise and delight features – for that segment. Release again.
  3. Third, differentiate your product, so that it is more desirable to that segment than your competitor. Release again.
  4. Finally, start tackling additional market segments.

Segmenting

Segmenting the market makes a lot of sense – Microsoft doesn’t have to be all things to all people. They don’t have to match all of the features of the iPod. They only have to match the features that are relevant to that market segment. Enough to start to compete. And with incremental improvements, they can potentially take over that segment.

Iterative Development

Having a smaller target allows Microsoft to not only release a first-version of the Zune with fewer features, it allows them to release more quickly. They don’t (yet) have to worry about a portfolio strategy – they can target a single user segment, and focus on delighting them. With enough distinctive capabilities, they can potentially differentiate their product from the competition.

Here’s a fairly harsh (and valid) critique of the first generation Zune, in comparison with the iPod. What the article doesn’t do is look at the strategy we’ve defined – it evaluates revision 1 against the “end game”, and the Zune comes up short. That’s a risk of introducing an initial “not a winner” product. But how much money are you losing if you wait until you think you can win before releasing the first one? Don’t get caught in a blender, segment your market analysis.
Every situation is different – you have to balance perception versus early sales. Will a first-gen product hurt future sales if it isn’t “ready to win?” If so, then you shouldn’t release it. But if it is a winner for some, or at least a competitor, it may make sense. I don’t think Microsoft will have trouble overcoming a poor reputation for the first release of the Zune. I wasn’t paying attention at the time, but I’ve heard Tom Merritt and others allude to how “crappy” the first iPod was. Doesn’t seem to bother anyone now.

Moving Targets

Apple will certainly present a moving target in the iPod by adding new features or improving existing ones. Microsoft will have to either predict and match the new features – in an endless battle of keeping up with the Jones’, or they will have to introduce new features that cause Apple to respond. Apple has “first mover advantage” and dominates the market. But Microsoft has a “second mover advantage” – they are able to learn from Apple’s investments in earlier products too.

There are two examples of features that show both Apple and Microsoft trying to redefine the “must haves” for the market. Apple just released the iPod Touch – an iPod with a touch-screen interface. And the interface is indeed very slick (I played with one over the weekend). People (in the targeted market segments) might decide that this is a significant differentiator, or they might not. The jury is still out.

Microsoft introduced the ability to squirt a song from one Zune to another. This “social networking” element would ideally allow people to share music, temporarily, with other people – who would then buy the music for themselves. There was a painful joke that the only squirting that was happening was on the Microsoft campus in Redmond, because that was the only place you were likely to get close enough to another Zune owner to squirt anything. Aside for that, the songs were over-protected with DRM (digital rights management, aka copy protection). A squirted song could only be played three times, and had a limited shelf-life. Once either limit was reached, the song was deleted from the recipient’s Zune. With the new version of the Zune, the calendar-based shelf-life has been removed (although you are still limited to X plays of the song).

We’re looking forward to watching both products evolve in the battle. Consumers win when there’s competition like this – so for now, even as a happy iPod shuffle owner, I’m rooting for the underdog. Yes, there is irony in calling Microsoft an underdog.

Different Business Models

There may also be advantages for Microsoft in having a different business model for their music player. Apple has certainly benefited from the iPod to iTunes to Apple computer “closed platform” linkage. While iTunes is available for non-apple computers, there is an implied linkage, and analysts believe a causal relationship that drives Apple computer purchases by iPod owners.

Microsoft is probably just trying to be a player in a profitable market.If you want to look at market share analysis for the Zune and iPod, and for PCs and Macs, read this article, instead of relying on the hazy data above. Those guys are way better at it than we are, and there’s a lot of conflicting data out there – this article seems very credible.

Conclusion

This article really isn’t a prescriptive one, as much as it is an exposure of a strategy writ large – pick a segment of the market, release iteratively, and attempt to displace the 800 lb gorilla. We’ll see if it works.

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