Microsoft's Zune tunes in for battle of the iPods

When Bill Gates bounded on to the stage at a free concert thrown in Microsoft's native Seattle to launch its new Zune portable music player, it was the device's file sharing capabilities he wanted to talk up.

Having wirelessly swap-ped a copy of the B-52s' "Love Shack" with a local radio DJ on the stage with him, the Microsoft founder told the crowd: "We know people care a lot about their music. We know many fans will really appreciate the ability to share songs with each other. We want to create an online and an offline community."

The wireless networking capability of the Zune is the one significant feature which marks out the device from Apple's all-conquering iPod - from whom Microsoft hopes to win a chunk of market share this Christmas. The device went on sale in the US yesterday, after simultaneous free concerts around the country - the Red Hot Chili Peppers in Los Angeles, Queens of the Stone Age in New York and the Secret Machines in Seattle.

The scale of the launch and the level of pre-release hype, though, was out of all proportion to the modest expectations for the product, at least in its early days. Analysts are sceptical that it will even dent the Apple juggernaut, derisive of the notion that it is the "iPod killer" hoped for by those who fear Apple is winning a monopoly in online music.

Microsoft has copied many of the features of the iPod, and all of Apple's business model. The Zune is linked to an online store called the Zune Marketplace, selling songs which are compatible only with the Zune player. The $249, 30 GB device competes with one of the largest in the iPod range and, while critics have preferred the bigger Zune screen for viewing pictures and video, it has been slammed for being too heavy.

Charlie Wolf, technology sector analyst at Needham & Co, reckons Microsoft may sell between 500,000 and a million Zune devices by the end of the year. Apple is selling around 3 million iPods a month, even before taking into account the likely extra Christmas gift sales.

The Zune is not likely to take a measurable chunk out of the iPod's US market share of over 75 per cent.

"It could become a serious threat because this is the first time that a rival has come in with the same business model as Apple but, right now, in its current incarnation the Zune is a joke. There is nothing exciting about the offering, and that includes the Zune Marketplace. Apple's iTunes is providing far more, 1.5 million more songs, plus videos and movies," Mr Wolf said.

"My sense is that Microsoft wanted to throw a stake in the ground, so at least they have something out there this Christmas, and then they will progressively improve it."

That is exactly what was promised by Steve Ballmer, Microsoft's chief executive. The company is paying a royalty on each Zune to the big music companies, to ease their fears of piracy and to allow an expansion of the Zune's music sharing capabilities over time.

"You could say, 'yeah we're starting out umpty-ump millions of players behind', or you could say 'hey look, there is a whole new paradigm that is going to happen in this business and we're jumping in at the beginning'," Mr Ballmer said.