The mystery surrounding ‘Zune’ was unveiled a tiny bit recently when Microsoft made public a brief description of its new portable music device that will go up against Apple’s iPod. Due later this year, Zune will play audio, video, have a wi-fi wireless connection, and hard drive.

Yet the mystery was close to being unravelled. Only more questions were raised

“What does the wireless connect to? Does it connect to the network itself? Or does it connect to the PC?” asked Roger Kay, principal analyst and president of technology research firm Endpoint Technologies Associates Inc.

As the debate rages over what additional features Microsoft’s upcoming products needs to beat the iPod, investors are also pondering whether developing it will be a worthwhile investment. After unveiling its strategy to dive deeper into the portable entertainment market on Thursday, Wall Street’s reaction was a thumbs down share price fell 2.1 percent to close at $23.87.

Microsoft’s aim to enter the portable entertainment device market is part of the company’s plans to expand beyond PC software, a move which some analysts see as a strategic, necessary step for the company to expand.

For the past several years, Microsoft has been competing with iPod through its ‘Play for Sure’ alliance, which binds the world’s largest software maker to various consumer electronics makes.

It was meant to work in the following way: Microsoft would provide the software and the companies would provide the hardware, similar to the Windows/personal computer relationship which made the Redmond-Wash.-based company a household name.

However the music player alliance failed to put a dent in Apple’s dominance of the market, which spurred Microsoft to take the challenge straight to Apple.

Microsoft has already said that it expects to take a five year hit in its wallet before Zune makes a profit. Such a move isn’t unprecedented. Its foray into the video game market with Xbox in 2001 to compete against the Sony Playstation has yet to be profitable with the losses expected to end by 2008.

Status of the Market. The portable entertainment device market – devices that are portable and play digital media (music, videos and games) - has been lucrative due to its wide reach and high worth. “Roughly one in three online adults (54.1 million) owns a portable digital media device, with an average per person spending of $421 in the past 12 months”, according to the Consumer Electronics Association (CEA), a market research firm, in April 2006.

The firm adds that “94 percent of the usage for portable device is listening to music, with future projection for MP3 players set to grow at 20 percent to 33.3 million units in 2007.”

Currently, Apple has a tight grip on the portable music market that Microsoft wants a part of. “Apple assumed a 70 percent stake in all types of MP3 players on the market, and maintained a 90 percent share in the hard drive market, as of February this year”, according to NPD, a market research firm. Microsoft’s decision to follow Apple could be seen as a way of counteracting a ‘spill over effect’ Apple is generating, where the dominance of one segment leads to dominance in another.

Entry seen as strategic Move.The receding growth rate in the U.S. PC market has played a role in decreased profits for hardware makers. With the Windows operating system being an integral part of such computer systems Microsoft has also been feeling the pressure.

But even as the PC market begins to reach a saturation rate, the market for portable entertainment devices is taking off. “We discover that people get excited about hand held devices, which you can touch and play with … such as Palm pilots and iPod … which can make a very big impact, if successful, on the market,” said Rob Enderle, principal analysts at the Enderle Group, a technology research firm.

According to one analyst, Microsoft’s decision to enter the portable market was more than just about winning that limited battle, believing that the company’s aim is to stem the proliferation of Apple products into the consumers’ home.

Michael Garternberg, vice principal analyst and research director at JupiterResearch believes that the market which developed around the iPod, creating various accessories for the players, generated a scare for Microsoft. The focus was no longer so much about what device Microsoft was selling, but its ability to divert customers from purchasing into the ‘Apple chain.’

In such a chain, the downloaded songs purchased at the iTunes Music store, are then transferred with an Apple Macintosh computer, and then into an Apple iPod.