So I'm reading the transcript of a Financial Analyst Briefing that Robbie Bach had during CES. When it came time for the Zune to be discussed, I was quite engaged in the exchange. I've extracted that part of the transcript and I'm re-printing it here. If you want to see the full thing (which talks about Windows Mobile, XBOX Live, etc) then click here for the
Word Document. The following, below, is the section of the transcript dealing with Zune specifically.
Thoughts?
ROBBIE BACH: One more question, anybody have a final burning ‑‑ perfect, right in the front, right where the mike is.
QUESTION: We didn't talk about the music business at all.
ROBBIE BACH: Sure.
QUESTION: Is that still strategic? When you really look at what's going on, your biggest competitor is turning it more into a mobile computing device with applications.
ROBBIE BACH: Sure.
QUESTION: And we just haven't heard much ‑‑
ROBBIE BACH: The thing I would say about the music business, I think music is important, and I think the way to think about it is, you have to think about it more ‑‑ I'll say this and then explain it ‑‑ more horizontally than vertically. If three or four years ago you said, oh, music is a end-to-end vertical business in and of itself, I would say it's shifting to being something that's important on all the screens. And we'll manage to monetize that in a variety of different ways, but the bigger capability is you've got to have music as part of the experience, and you've got to be really good at it. And that is why I highlighted yesterday our strength in reviews, because I think it shows we've gotten really good at creating a great music experience.
Now if you think about what that could mean across all those screens, while maybe we don't make very much money on a 69 or 99 cent track song, it could mean a lot to selling a PC, or selling an Xbox, or selling mobile phones, or selling the Zune device itself. And so we'll find different ways to build that into a good business. But I think it's essential, I think it's essential. And places where the money gets made, just so nobody is confused, I think everybody knows this, the place money gets made is by the labels, and ultimately through touring on the artist. Apple may make some money on all the volume they do, but they have to do really big numbers to make a relatively small low margin business, and for Zune, on us for the tracks on Zune is not a meaningful number from a financial perspective. Having music, super important.
QUESTION: (Off mike.)
ROBBIE BACH: Sure. You seem to have hit a strain.
QUESTION: For me the question is, when you guys entered the Zune business, which was obviously very controversial, and hundreds, we don't know exactly how much was invested, but significant amounts of money were invested.
ROBBIE BACH: Sure.
QUESTION: And money lost on the hardware side. The argument was, you guys had to do both the hardware and software. And you're saying you have to be on every screen, that would suggest that just the software and service side is sufficient, which sort of makes one question the logic for entering the hardware business. And every time Microsoft enters the hardware business, to some degree, it creates some tension with its other businesses, obviously because you're trying to have a relationships with OEMs. So how do you sort of think about ‑‑
ROBBIE BACH: Well, I think the way to think about it, first of all, I think the portable media market will continue. It's not going to grow at the pace it was, in fact, it will probably decline a little bit. But I think there will be still a market for standalone players, and we plan to continue to play there.
I also think that part of the reason our software has gotten so good is because we have had this vertical structure where we really could concentrate on the architecture and make sure we get it right. If I had to do it over again, you could ask the question, well, gosh, if you had to do it over again, would you do exactly the same thing? And of course the answer is, in almost everything we do, probably not exactly the same thing. But I do think taking a leadership role in the scenario, which we were not doing before, we were a passive player in the scenario before, taking a leadership role and having a first party role in the scenario is absolutely essential, whether you decide to do hardware or not, you have to have ‑‑ we would have changed our relationship, independent of whether we did hardware, we would have changed our relationship with every OEM, and it would have caused just as much disruption, I'll say, to the extent it did, in any even, because the requirement had to be a much stronger player, and a defining player, not just a supplier of technology, which is the way I would describe our old experience.
I'll take a final question, because then I'm really going to go.
QUESTION: With Apple's move on DRM and with the fact that the whole world has gone to MP3s except you now, does that diminish ‑‑
ZON ELLIS: I think about 75 or 80 percent of the tracks on Zune are MP3 already, and we would go all MP3 tomorrow. We don't have a philosophy around DRM on music. We do it because the labels require it.
QUESTION: So in a world where everything is MP3, is it really that strategic to have your own device? If all you're selling is MP3s anyway, I guess I just don't understand the strategic value.
ROBBIE BACH: The reason to be in the device business is because ultimately we think we can make some money there. If it was just ‑‑ I would never be in the device business, you can't be in the MP3 business as a loss leader. Then it has nothing to do with DRM or MP3 or anything else, you have to be in it to make money. And we have to prove that. I'll accept that as a challenge for us to prove that we can make money doing that. I would agree with that.
So to the extent, with our plan to stay in it, you should read that as a statement that we intend to run that as a money-making effort, not as a loss leader. You can't run it like the Xbox business where the hardware is sort of breakeven, and you make money elsewhere, because there isn't that much money to make elsewhere.
I do, though, think, again, independent of MP3 and DRM, having a great music experience in this three-screen world is just a requirement, and you have to have the social context around it, you have to have the marketplace around it. Customers are going to expect it. And it's just going to become a price of entry into that three-screen world that I'm talking about. And that's why if you ask me who we think our competitors are in that three-screen world, certainly Apple would be on the list. Sony could potentially be on the list if they got stronger in a couple of areas, but I think you're going to have to have a music solution to be in that game.
I want to thank you guys for your time and attention, I know you're busy here, and I hope you enjoy the rest of the show. Thanks.