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2. Reinvent the Online Media Store
Apple’s iPod/iTunes business is the envy of many other companies because it’s “vertical.” Apple controls an entire mobile media ecosystem, from the copy-protected AAC format of the original music and video files to the gadgets that play these files and the software customers use to purchase, download, and store them. It doesn’t have to share its revenues with anyone except the record labels and TV networks that create the content. If it weren’t interested in creating such an ecosystem for itself, Microsoft wouldn’t bother to build its own portable media player.

Microsoft already has its own music and video formats, Windows Media Audio and Windows Media Video (those files on your computer with the extensions .wma and .wmv). If last week’s rumors are true, it’s also working on the player gadget. The last piece is the PC interface and media store.

Beating the iPod will be tough – but when it comes to iTunes, there’s plenty of room for improvement. iTunes predated the iPod by almost a year, and was designed as a general media player for the Mac. As a bridge between a PC and a portable player, it still lacks the easy, intuitive style one would expect from Apple. Dumped into iTunes, the thousands of music and video files an iPod owner is likely to purchase or rip from CDs become a disorganized mess. Determining which files are stored on one’s PC and which on one’s iPod, and whether the two are correctly synchronized, requires careful attention. iTunes’ online component, the iTunes Music Store, is far more confusing to navigate than true retail websites such as Amazon. Surely, Microsoft’s legions of software developers can do better.

They aren’t off to a promising start. MSN Music, the company’s music portal, has negligible sales compared with the iTunes store, and doesn’t even work in the popular Firefox browser. And Urge, an online music store developed by Microsoft for MTV, is a slavish imitation of the iTunes store, the main difference being that songs purchased at Urge will play only on PCs or mobile devices that run Windows Media Player.

3. Put Wireless Connectivity to Good Use
It’s not clear how Microsoft might put Wi-Fi to work in its rumored media player. There are a few ways Wi-Fi could help – and more than a few that would seem pointless.

Wi-Fi isn’t particularly needed, for example, as a replacement for the USB and FireWire cables that connect today’s media players with their owners’ PCs. With Wi-Fi, users would still have to be in the same room with their PCs. And while Wi-Fi transmits data faster than USB or FireWire, the difference isn’t big enough to save noticeable amounts of time.

Users of Wi-Fi media players might also be able to connect to a music store from a Wi-Fi hotspot (say, a Starbucks) and shop for TV shows and music directly from their players. But an even more interesting application of Wi-Fi would be to let MiPod users trade music and videos wirelessly, either with other people within Wi-Fi range or with friends using MiPods and some type of instant-messaging interface to communicate over the Internet.

Media sharing is one of the fastest-growing forms of interaction within online social networks, and it’s a feature available on a growing number of cell phones. MusicGremlin is already going in this direction with its wireless Gremlin music player, which allows users to “beam” songs to one another. Microsoft may be thinking along similar lines. According to a follow-up report in the New York Times, “A person who works closely with one of the music labels said that the Microsoft device would permit users to play songs wirelessly from other Microsoft players in the vicinity. Users could ‘tag’ music that looked interesting and then play it one or more times without paying for it, this person said.” Good thinking. The more MiPod-owning friends a person has, the more incentive he or she would have to buy one.

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