Zune Dies, iPod Lives

Bid farewell to the Microsoft (NAS: MSFT) Zune. Long live the Apple (NAS: AAPL) iPod classic!

A few weeks ago, Microsoft had updated a Zune support page that indicated that the Zune was being discontinued to focus efforts on Windows Phone 7 as the center of the company's mobile music and video strategy. Shortly after this website was discovered, Mr. Softy backtracked and said the site was put up by mistake. Now, Microsoft has yet again changed its mind and confirmed once more that Zune hardware is no longer in the making.

Meanwhile, speculation has lingered that Apple would kill off the stagnant iPod classic line in favor of iOS devices like the iPod touch and iPod nano. The current generation of the iPod classic was introduced more than three years ago, in September 2008. It's the only iPod that currently doesn't use flash storage, still relying on an old-fashioned spinning disk hard drive.

The notion of killing off the iPod makes some sense. The iPod segment overall is the only one within Apple that has been showing revenue declines as the Mac, iPhone, and iPad lines continue to steamroll forward at breakneck growth rates.

Instead of looking at reasons to kill the model, let's look at reasons to keep the model. Although last quarter's overall iPod experienced a 20% drop in unit sales, the division still brought in $1.3 billion in revenue, which is the size of some small companies alone. In addition, the iPod classic targets a different audience: music hoarders who value capacity and aren't interested in touchscreen games.

Unlike Hewlett-Packard (NYS: HPQ) , Apple doesn't like to get rid of divisions that are still profitable. With the hardware admittedly dated, it's tough to imagine that Apple spends much to maintain the segment; meanwhile, component costs are dropping faster than retail prices.

A study by market researcher NPD Group released in February listed the top 10 MP3 players by unit sales in 2010. Apple literally claimed the top nine spots with different iPod models, and the classic landed in fifth place. The model is continuing to sell well even without having seen any upgrades for years.

In stark contrast, the Zune has never done well. Back in 2009, Microsoft disclosed that its Zune revenue had fallen by $100 million, a 54% decline. In the discussion of the Entertainment and Devices Division, or EDD, the 2010 10-K annual report adds, "Non-gaming revenue decreased $197 million or 25% primarily reflecting decreased Zune and Windows Phone revenue."

I'm bullish on Windows Phone 7 and Windows 8. Ditching the Zune and focusing on those platforms is the right thing to do. In the meantime, the iconic iPod classic is still holding its own in sales, so why kill it?

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At the time thisarticle was published Fool contributorEvan Niuowns shares of Apple, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Apple and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Microsoft and Apple, as well as creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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