Microsoft Getting Under Apple's Skin

Updated from 4:41 PM EDT

Microsoft (MSFT Quote) is taking a page out of Apple Computer's (AAPL Quote) book with plans to launch an integrated digital media player and service by the end of the year.

Dubbed Zune, the offerings will include a Microsoft-branded, hard drive-based music and entertainment player and an online media store, representatives for the software giant said on Friday. The new player and service will be incompatible with Microsoft's PlaysForSure initiative, through which partners such as Creative (CREAF Quote) and Napster (NAPS Quote) offer devices and content centered on Microsoft's Windows Media encoding software.

"It's a similar model to [Apple's iTunes]," said company spokeswoman Katy Gentes.

The move marks a risky step for Microsoft, which has been aggressively trying to diversify its revenue beyond its core Windows and Office software programs. Not only has Apple already entrenched itself as the dominant player in the space, but Microsoft risks alienating partners who have signed on to its Plays For Sure program.

And then there's the little matter of profitability. Despite the fast growth of the digital music industry, for most device makers and service providers other than Apple, profits have been hard to come by. That probably won't be music to the ears of Microsoft investors, who have seen the company lose millions of dollars on initiatives such as its Xbox game system and its MSN Web service.

The Zune effort has a chance to surprise and challenge Apple, says Rob Enderle, principal analyst with the Enderle Group, an industry consulting firm. Still, given Apple's dominance of the digital music market -- and Microsoft's poor track record with new initiatives -- the odds are still in Apple's favor, he says.

"We've certainly seen [Microsoft] try and fail with a lot of things," says Enderle. "This has the same potential [upside], but it's [also] got a lot of downside."