Microsoft phone system hits reset on digital music

To date, Microsoft's effort to address the digital music market has largely focused on its Zune player and Zune Pass subscription service, which have won favorable reviews but few customers. But with the recent unveiling of its Windows Phone 7 Series operating system at the Mobile World Congress conference in Barcelona, Microsoft hopes to reboot its struggling digital music strategy.

Even the well-received Zune HD device, introduced last fall, hasn't been enough to convince music fans to convert to the Zune Pass. The company says it has sold only 3.8 million players since 2006, and NPD Group estimated in November that it has a 2 percent share of the U.S. portable media player market, compared with 70 percent for Apple's iPod.

So Microsoft has made it a priority to expand the Zune service to other platforms. In November, it added the Zune's video service to its Xbox Live network, consisting of more than 20 million worldwide users of the Xbox 360 gaming console. Since then, Zune communications director Jose Pinero says the number of daily HD video downloads and streams has doubled. Now, Microsoft plans to use its Windows Phone 7 platform to bring Zune to mobile customers.

"Anybody who gets a Windows Phone 7 Series phone is going to get a Zune within that device," Pinero says.

INTERNATIONAL PUSH

The most immediate impact this has is to expand the Zune service to countries outside of the United States and Canada, which are the only markets where the Zune is sold. While Microsoft will continue to sell the original Zune player in the States, Pinero says it doesn't plan to expand it to other countries, instead relying on the mobile phone software to bring the Zune service to those markets.

For this strategy to work, Microsoft will have to turn around its equally struggling mobile phone business. According to technology research and consulting firm Gartner, Windows Mobile handsets rank fourth in worldwide smart-phone sales, at 7.9 percent, as of third-quarter 2009, down from 11 percent a year earlier and behind Nokia, BlackBerry parent Research in Motion and Apple.

But those rankings remain fluid, as analysts expect global smart-phone sales to double in the next three years.

"There's certainly opportunity for Microsoft and other players in this market to grab share in the smart-phone space," says Sue Kevorkian, an analyst at tech market research firm