Microsoft's Zune: $100 Million Sales Drop Plus Layoffs Equals Questions

This story was written by Staci D. Kramer.
Microsoft's Entertainment and Devices division, particularly the Zune group, reportedly was hit hard in Thursday's unprecedented layoff of 1,400 employees. (Microsoft (NSDQ: MSFT) isn't breaking down the layoffs by numbers and departments.) Late Friday, when the company filed its 10-Q, the "why" was a lot clearer: "Zune platform revenue decreased $100 million or 54 percent reflecting a decrease in device sales." Either would have been enough to wind up the "ding, dong, the Zune is dead" crowd; together, you'd think it's time to buy some landfill space.

Not so, insists Zune spokesman Adam Sohn. The day the layoffs were announced, he told me "Zune is committed and on track to deliver against our current product roadmap, and are as focused as ever on providing great software and content-powered experiences to help bring our connected entertainment vision to life." After the 10-Q was filed, I asked Sohn if he wanted to update that statement. He said it is "still true""we are in this business for the long term and committed to it."

How to explain the numbers? Sohn said there isn't much data to share about the 10-Q but mentioned a mix of factors that could have contributed: steep discounting across the line and "massive special prices" on the older 30 gig units accounting for some of the drop; the touch economy overall and a shrinking MP3 category. (The latter didn't seem to hurt iPod sales in the holiday quarter.)

Beyond the device: But Sohn focused more on where Zune is headed: "We have a broader vision than just selling MP3 players, we are thinking about more connected entertainment experiences driven by the Zune software and services for not only Zune device owners but other 'tuners' as well. This vision requires continued investment in the business as we grow the capabilities of what the service needs to do for other screens and devices."

Free Zune services: Two of the biggest developments for Zune in 2008 weren't device-specificpositioning Zune's free software app for non Zune-owners and offering Zune Marketplace subscribers 10 free tracks a month as part of the $14.95 monthly fee. The songs can be burned to CDs and moved to other devices so are not Zune reliant. Both developments move the Zune concept beyond the device but it's not clear yet how, or if, Microsoft will make using other "tuners" as simple as staying in the linear software-device environment.

I'm a Zune user with three devices and a Marketplace subscription. (We also have an iPhone in the house and numerous MP3 players.) I've been fooled as a consumer by Microsoft before, investing hardware and software the company has stood behind steadfastly until the day it was dumped. But you would think that if Microsoft had plans to shut down Zune any time soon, doing it all at once would have fit in with the layoffs and cost cutting announced late last week.

Chris Stephenson, GM of global marketing for Microsoft's entertainment business and the exec who helped launch Zune, will be joining us for EconMusic in LA on Feb. 5

Photo Credit: KhE

By Staci D. Kramer