Microsoft and Apple race to launch wireless downloads

Microsoft and Apple are in a desperate behind-the-scenes race to develop a new generation of personal music and video players in time for Christmas, with Microsoft, the biggest name in software, aiming to finally break the dominance of the mighty iPod.

It already looks as though the winner could be the first to develop a wireless player, where songs can be downloaded without having to plug the equipment into a personal computer.

The Silicon Valley rumour mill has been spinning like crazy in recent weeks, amid speculation that Microsoft could have its rival to the iPod ready to unveil by the autumn.

And now Apple is also said to be closing in on a new product launch in collaboration with Research in Motion, the maker of the Blackberry, plus a new version of the video iPod.

The secrecy surrounding both sides' product development project reflects the high stakes being played for. Apple is selling about 3 million iPods every month and sales of the devices are expected to top $8bn (£4.3bn) this year. It makes a further $2bn in revenues from music sales through its iTunes online music store.

Microsoft, whose MSN network of websites also sells music, is determined to move back in from the sidelines of this market.

Peter Misek, a technology analyst at Canaccord Adams, said the software giant faces an uphill struggle to topple Apple, but appears to have learnt from the success of the iPod, and particularly from the simplicity of its design. Newcomers will need to prise open the close link between iTunes - which accounts for more than three-quarters of all music purchased online - and the iPod, which is the only device able to easily play music bought on iTunes.

Mr Misek said: "The big purported advantage that Microsoft will have is the wireless connectivity of their device, which will trump the iPod in terms of functionality and ease of use, and make it very easy to transfer your iTunes downloads to the new device.

"The key issue for Microsoft is not financial, it is industrial design, and their tendency to make a user interface that is overly cumbersome. The challenge is to make it easy to get music, to store it, to move it, and to burn it.

"It is not too late to topple the iPod but it will be very difficult."

In a move that could allow Microsoft to make significant early inroads into Apple's market share, it is understood to be investigating a way of allowing iTunes users to transfer their purchased music to the new Microsoft service without having to buy songs a second time. In effect, Microsoft would take on this cost itself, and this is believed to be a key element of the talks it is having with record labels as it organises the content for its own online music store. This is likely to be built around the Urge music store it has launched with MTV, the music television network.

Microsoft is also considering using the Xbox brand it created for its online gaming console as a catch-all brand for a range of digital music, video and games players.

Investors say that excitement around Microsoft's plans comes at an opportune moment after a string of delays in its core software business. An "investor day" at Microsoft headquarters in Seattle at the end of this month had promised otherwise to be a defensive affair. Vista, the next-generation Windows operating system, has been pushed into 2007, and the company said last week that Office - the suite of desktop software products which includes Word and Excel - will also be three months late.

The digital music player launch will be a key test of Robbie Bach, the head of the Xbox division and a rising star within Microsoft. The company is facing a period of management transition after Bill Gates said he would cede his role as chief software architect to Ray Ozzie and then go part-time in 2008. Mr Bach and a new generation of executives are fighting to turn Microsoft into a media technology company with a vision broader than the desktop software that is at the core of the current group.