Microsoft Corp. officials for the first time have confirmed that the software giant is readying a portable music player and integrated service, shedding new light on a topic that has fueled rampant speculation in news reports and blog postings for weeks.

In an exclusive first interview with Billboard, Chris Stephenson, Microsoft's new GM of marketing for MSN Entertainment Business, says the company will later this year launch Zune, an umbrella brand for what he says is a family of hardware and software products targeting various digital entertainment services.

The first implementation of this will be the portable music player and digital music service, in what is the company's strongest effort yet to rein in Apple Computer's iTunes/iPod juggernaut, currently responsible for about 70% of the digital music market and 75% of the portable digital music player market.

Additional Zune-branded devices will follow, including a portable video player and, potentially, a portable game device, although Stephenson would not comment on the videogame element of the initiative.

Because the product lines have not yet been finalized, Microsoft would not discuss specifications. However, Stephenson did confirm that the initial music device will contain a hard drive and the much-discussed Wi-Fi connection for wireless Internet access.

Exactly how Microsoft intends to utilize this wireless Internet capability remains unclear. Stephenson says the company is examining seven or eight different wireless scenarios. They range from allowing users to view and sample music from other Zune devices in the same hot spot, to accessing content stored in an online digital locker, to buying and downloading music directly to the device.

Stephenson says that wireless Internet access is necessary for the portable devices to fit into Microsoft's grander plan. That scenario is to provide ubiquitous access to digital media from a wide range of Windows-powered devices in what ultimately aspires to be one part MySpace, one part iTunes and one part Xbox Live.

Zune users will be able to view each other's playlists, recommend music and sample tracks in what Stephenson describes as a multifaceted music discovery experience. This capability will extend to the Xbox 360 game console, PCs running Windows Media Center and mobile phones using the Windows Mobile operating system.

The ability to connect the different devices is a key part of the strategy, Stephenson says. Whether it's a portable media device, or a phone, or the Xbox or Media Center PC, the idea is you can access your entertainment from anywhere.

Music will be the primary content at first, but will eventually expand to include video and other types of media. Microsoft and music industry sources say there currently are not any licensing deals in place.

Record label executives briefed on the device and service give high marks to this community strategy.

We're incredibly excited by it, says George White, senior VP of strategy and product development at Warner Music Group. It's something that we hoped peer-to-peer services would bring to the digital retail space.

But unlike the early P2P space, this sharing will have limitations. Early speculation is that this community-sharing feature would be limited to 10 users in the same hot spot at a time. Virgin Records executive VP Jeff Kempler, while not confirming any specific details of the pending service, says a degree of controlled sharing is necessary, as is a willingness to experiment with new business models.

We're going to have to think about evolving licensing schemes that have some flexibility in them, he says. There's going to be a balancing of the benefits of discovery and remuneration of paid content acquisition.

What may have the music industry most enthused is that Microsoft is finally putting its deep pockets and industry clout behind a new digital music experience that competes with Apple.

While publicly praising Apple's success in building the digital music space, music industry executives have expressed frustration at the company's my-way-or-the-highway tactics. Competition means more opportunities to sell digital music in ways Apple won't allow. For instance, Microsoft is more open to variable pricing, whereas Apple is not.

We definitely see the need for really strong competition in the marketplace, White says. We'd love to see more players getting in and offering more types of digital content. We think that having more, stronger competition is more likely to yield that outcome.

Microsoft will support the Zune launch with a massive advertising and marketing campaign expected to be heavily artist-centric, including several live performances nationwide. Stephenson says the total effort will be on par with that of the Xbox 360 launch, which cost a reported $500 million.

Left hanging in all this is the fate of the existing MSN Music service. According to Stephenson, Zune is not a relaunch of the MSN service, but rather a new branded service altogether. While he says Microsoft will continue to support the service, it won't be included in the Zune advertising efforts.

With all the company's resources focused on Zune, it appears likely MSN Music will be left to die on the vine.

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