The first version of the Microsoft’s Zune was pretty much laughed off the stage. The second generation Zune wasn’t. Microsoft had clearly improved it in almost every department that mattered, including look and feel – which is beyond important, when you’re trying to knock the iPod off its perch. One or two reviewers even preferred it to the iPod or deemed it equivalent.

In tandem with the Zune, Microsoft set up its online music store, the Zune Marketplace, starting with around 2 million songs and growing to 3 million within a year – with the big four, EMI, Warner, Sony and Universal, all providing content. It’s not as big as iTunes yet, but it’s big. Microsoft differentiated the Zune initially by providing WiFi and “the social” – an ability to share music, Zune to Zune. It differentiated its Zune Marketplace by offering an “all you can eat” option for a US$14.99-per-month subscription.

There were some negatives to the Zune caused by Microsoft DRM. Songs originally purchased under Microsoft’s “PlaysForSure” DRM system did not play at all on the Zune. The song sharing idea proved clunky because you couldn’t really share songs in a meaningful way without buying them. The bigger problem, though, was that the demographic that Microsoft tried to appeal to is the demographic that doesn’t think you have to pay for music. To the teens, “the social” was underwhelming and DRM restrictions were anathema. So was the fact that the Zune is a Windows-only thing. Nevertheless, all of these things could be counted as teething problems, that could be fixed or smoothed over.

The Unmatchable Speed of Apple

The real barrier to Zune adoption is that Microsoft is competing head-to-head with last-year’s iPod. By the time Microsoft had fixed the Zune’s first generation design issues, the iPod was into a whole new generation, with the iTouch and the iPhone. And as Microsoft scrambles to match that huge leap, Apple is suddenly into movie rentals. And all the while the iPod becomes more and more of a standard. More and more companies make iPod compatible devices. TV manufacturers are already producing devices that have an iPod interface, so they can play video direct from the iPod.

Right now, the iPod is stealing the video market from under everyone’s noses. Microsoft cannot and will not catch Apple this way. If it is to have a chance it must leap a generation or do something radical. That’s not an easy thing to do against an innovative competitor like Apple.

Seven years ago I remember having a long conversation with a Microsoft executive, who explained what Microsoft’s different market goals were. They had multiple ones, of course, for the desktop, for the mobile market, for the server, for media and for the Internet. This executive was reasonably certain that Microsoft would perform very strongly in the media market, explaining that the company saw itself serving huge volumes of media from large servers across the Internet to a whole array of media devices. Microsoft invested heavily in this and, as a result, it has an impressive array of media software, including a number of media components that are undoubtedly best of breed.

What it doesn’t have is any chance of dominating the market. At best it will get a small piece of the pie. Apple, to its credit, discovered what the media business model needed to be and went with it. Microsoft was left in dust, trying to rethink its whole approach. And all it can think to do is imitate Apple. Too obvious, too little, too late.