Zune: another misstep, or an Ipod killer? (MSFT, AAPL)

I don't own shares in Microsoft or Apple, but I have looked several times in the past at Microsoft (as when I wrote about socially responsible investing), just because it has been so cheap for the past year. I've never convinced myself to buy shares, largely because I have a little bit of a bad taste in my mouth about the company and its products. Apple I don't own because I simply missed the boat.

But the world is abuzz with Microsoft's pending announcement today that they're no longer content to support devices from Iriver and Creative Labs and other partners as they have in the past, and will now be coming out with their own branded handheld multimedia device for this year's holiday season -- the Zune.

Details are sketchy so far, but the device looks like an Ipod with a bigger screen (pictures here), and word is that it will work within its own self-contained environment, with a store (like Itunes) and wifi capability for perhaps buying content online without a computer, or communicating with local friends on some sort of social song-sharing network. The AP story on today's announcement gives some more details.

Now, there's certainly room for some minor optimism here -- I'm not an Ipod owner, though I use one from time to time, and I'm probably not the target audience because I'm satisfied with the podcast receiving technology of my Palm LifeDrive (which is itself a failed product, but one that I really like).

But it seems clear that this device will try to aggressively out-feature the Ipod, and at a comparable cost (I hope for their sake that it's well below $300).

The problem is, how does a new product break in when the dominant provider has built a cult-like following and brand image, set the rules for the marketplace and created a universe of accessories and complementary gadgets, and holds a 70% share?

I think it either has to be by offering a dramatically better product that's easier to use, or by making it comparable to the existing leader, and so much cheaper that you can't resist buying it. Sandisk and the other also-rans are trying to go with the "cheaper" route so far, and I haven't heard anything to make me think they're succeeding. The fact that they're being fashion-forward by including a brown version probably isn't going to be enough ... and I'm not a web 2.0 gadfly teenager, but I can't imagine that the wifi music sharing will be enough of a feature to help them pull even with the ipod -- it seems they're trying for a network effect with that feature, but all I can picture is one sad kid hanging out with his friends and trying to Zune-share with them while they all happily and obliviously listen to their Ipods.

Frankly, I'd bet with Apple on this one even if Zune does indeed have features not available on Ipods (like wireless) and it costs less for more memory (which isn't necessarily going to be the case). After seeing Microsoft products come out time and again, from successful ones like the Xbox to flops like Origami and the Tablet PC, I can't believe that they're suddenly going to figure out how to design a streamlined, user friendly interface for anything -- I expect we'll see another product that is top-heavy with features but difficult to operate.

And with the head start that Apple has with developing partnerships for selling online video and movies, Microsoft is going to have to fight tooth and nail just to develop a library as strong as Apple's, let alone stronger.

But one thing does intrigue me: As with Xbox, Microsoft is most likely willing to take huge losses on this in order to break into the space. One of the rumors (from Engadget in July) is that Microsoft will scan your Itunes purchased library and give you all of those songs for free on the new Zune device, essentially subsidizing your switchover and getting rid of at least one hurdle that switching consumers would face (since both Itunes and Zune-sold music and video will be proprietary -- that's an assumption for Zune but a reality for Itunes, no one with a large paid-download library would want to switch otherwise).

That's the only thing that might speed up any kind of volume in customer switchover from Ipod, in my opinion -- otherwise, they're just competing for all the customers who don't have an Ipod now. I think anyone who is thinking of buying an Ipod right now will continue to want an Ipod -- if they're that late an adopter, there's no reason to expect that they'll choose instead to buy a device with more complicated features and a lack of available user groups to exert peer pressure.

I still think Microsoft is an undervalued company -- but only because I think the impact of Vista on Microsoft and the whole PC value chain is going to be immense over the next year and a half (assuming that Vista ships in working order and does what they say it will). I might buy Microsoft to get exposure to Vista, but not to get a piece of Zune.

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Socially Responsible?

I don't generally believe that "socially responsible" investing is a particularly good way to go about getting good returns on your money, though it definitely works for some of the big managers in this area.

And there are several "sin" companies that I find interesting -- mostly in the gambling and alcohol sectors. I don't own any of them at this point, but it's certainly possible that I will in the future.

I have been interested, however, to find myself staying away from three companies recently that otherwise might be a bit interesting to me because I'm not comfortable for some reason with being invested in their businesses.

I have never held Altria, but this summer and fall it started to look appealing as an undervalued company with continuing dramatic international growth. Still, I never took it seriously because I can't see myself buying shares in and getting involved in a tobacco company due to a personal distaste for the cigarette business.

And recently, I started looking at Reed Elsevier (RUK). I'm an academic, and Elsevier is the dominant "brand" in academic publishing and most profitable scholarly publisher in the world, as well as owner of the strongest brand in legal research in LexisNexis and one of the bigger textbook companies in Harcourt. Still, I've been holding back even though I think the company will show a big return over the long haul -- I think Elsevier is a bad influence on scholarly communication and I'm a little wary of investing.

Along the same lines though to a much lesser degree, I've been holding off on investing in Microsoft (MSFT) . I don't think they're evil as some do, but I hate being a customer of theirs and I don't much like most of their products, ubiquitous though they are. I may still get over this personal dislike, but it is holding me back at the moment.

I don't avoid all companies that might be bad for the environment, or in an unpleasant business, or otherwise wouldn't pass "socially responsible" screens. I have owned plenty of oil companies in the past, for example, like Statoil (STO) and Petrobras (PBRA) and Suncor (SU), all of which are pretty rough on the environment to some degree ... and I currently own copper and gold miner Northern Orion (NTO), and there aren't many businesses that are as rough on the earth as mining. Even beyond that, my single most successful investing focus over the years has been on the oil tanker business, I made great returns on Torm (TRMD), Frontline (FRO), OMI (OMM), and Overseas Shipholding (OSG) in 2003 and 2004 (and, ironically, cashed in those returns last winter to buy a new car). I see Americans avoiding companies like those to be somewhat like a meat-eater decrying the death of animals from hunting or the livestock business -- kind of silly and a little bit hypocritical.

But my personal feelings about a company definitely are a part of my investing process. I don't screen my mutual funds in various retirement accounts to make sure that they don't invest in any company I dislike or disapprove of, but for the companies that I spend a lot of time researching and am interested in owning, a personal interest in the company and lack of distaste for them is important to me on some level.

This is really just to say, and perhaps it's obvious, that investing is personal for me. I invest in individual companies because I like being an owner of interesting companies with good stories and great potential, and it becomes much less fun and interesting if I don't like the companies. There are thousands of potential investment vehicles out there, I prefer to focus on the ones that I find interesting and appealing enough to make it worth my time and attention as well as my money.

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