Long before Apple’s iPhone, another Silicon Valley-based company pioneered the consumer-friendly smart phone. That company was Danger Inc. best known for its T-mobile branded Sidekick (the Paris Hilton smart phone of choice) and its user friendly mobile OS and Internet applications.

As of today, Danger is no more. Instead, the company is being gobbled up by Microsoft’s Entertainment and Devices Division, responsible for overseeing the Zune, XBox, Windows Mobile and Microsoft TV product lines.

How will Microsoft utilize Danger’s technology and expertise?

Consumers

Although successful in penetrating the corporate world with its Windows Mobile-powered smart phones, Microsoft hasn’t, until now, shown much interest in developing a consumer-friendly offering. There has long existed the misguided notion that non-business folk aren’t interested in doing much more with their mobile phones other than making calls, sending SMS or listening to music and taking photos. With the introduction of the iPhone, companies — including sleeping giants like Microsoft — are finally waking up.

Microsoft’s press release describes Danger’s customer base as “young and enthusiastic, Internet-savvy and socially inclined”, and that the team at Danger has a “deep understanding of consumers and a hold on what people want from mobility”.

Integration

Furthermore, the Entertainment and Devices Division is all about what Microsoft calls “connected experiences”, and it’s in this context where the acquisition has the most potential. Microsoft cites Danger’s mobile Web browsing, instant messaging, games, multimedia, and social networking applications, which in combination with MSN, Xbox, Zune, Windows Live and Windows Mobile technologies, it hopes will give the company a leg up in delivering “industry-leading entertainment and communication experiences”.

Zune phone?

How this will translate into tangible products is yet to be seen. While many are already predicting something along the lines of a Windows Mobile-powered Sidekick, alternatively, might we see Danger’s technology and expertise used to deliver a Zune-branded mobile phone? Although fulfilling the company’s “connected experiences” vision, the latter would imply that Microsoft is getting even more into hardware. Currently, the company sells its Windows Mobile smart phone OS and platform to various hardware vendors (which now includes Sony Ericsson) but doesn’t produce handsets of its own. Likewise, Danger is pitched as a “software and services” company and offers a hardware reference design to partners including Motorola and Sharp.

This post is syndicated from last100, our digital lifestyle blog covering Internet TV, digital music, Mobile Web and more. You can subscribe to last100 here.

Products, Products, Products

Let's take a closer look at exactly what was announced...

This year Gates' keynote mentioned the following products:

• Vista - according to Gates, Microsoft has sold more than 100 million Windows Vista licenses to date.
• IPTV (Internet TV) - British Telecom, TNT and CNN have developed apps for Microsoft Mediaroom Internet Protocol Television (IPTV) platform; e.g. TNT has enabled users "to view NASCAR Sprint Cup Series races from the driver’s vantage point by choosing from a series of in-car cameras". CNN is also doing an app for the US presidential elections. Microsoft says Mediaroom is running on 1 million set-top boxes worldwide. It also announced a new offering called DVR Anywhere, allowing users to watch their recorded programs on multiple TVs in the home, and a partnership with Samsung for HD content streaming from TV to PC.
• XBox (see below)
• Zune - since the November launch of Zune Social, currently in beta, Microsoft says that "more than 1.5 million people have joined the music-focused social network", which it says is proof that "Zune is tapping into consumers’ desire to share their musical passions with their broader community." However, Zune is clearly well below sales of the iPod - so probably not too much can be read into this. It is though encouraging to see Microsoft trying to extend online music experience past the 'closed shop' of iTunes; that may compel Apple to open up their iTunes platform a little more (we can only hope!).
• a new GPS-powered version of Tellme, Microsoft’s "voice-and-visual mobile service" that enables people to use voice commands on their phone as input, then receive output back visually on their phone screen. The example given was that "a person can “call” the Web on a mobile phone and say “movies” and the software will recognize where the person is located and send to that mobile phone’s screen a list of the theaters closest to that location."
• the Surface touch-screen computer; it's UI was Gates' main focus, but he also showed how Surface can send images directly to its social network product, Windows Live Spaces. Gates told the BBC that "in five years we'll have many tens of million of people sitting browsing their photos, browsing their music, organising their lives using this type of touch interface."
• Voice-activated technology for the car; including Sync, an "in-car communications and infotainment system for mobile phones and digital music players that has been available in select Ford models since September."
• 3D mapping - according to Webware "Gates predicts 3D environments will go with you: In the store, on the street, and so on. Devices will, of course, know your location."
• Windows Live users: 420 million worldwide

Digital dream becomes reality: Gates and Robbie Bach jam with Slash; photo by jidnet

Partnerships: NBC, ABC, Disney, MGM

As is now customary with Microsoft, there were a lot of partnerships announced with big media and electronics companies.

The most notable is a deal with NBC on an Olympics '08 website built with Silverlight technology - Microsoft's cross-browser, cross-platform plug-in for delivering online video. The site will host more than 3,000 hours of live and on-demand video of Olympic events. It will be ad-supported, with Microsoft and NBC sharing revenue. The site will be at NBCOlympics.com on MSN; and it's being touted as "the official U.S. online home of the 2008 Summer Olympics in Beijing." Users will be able to get custom feeds of just the events they're interested in.

Another big partnership was with ABC and Disney Channel, for their programs to appear on Xbox Live Video. In other 'big media' action, Microsoft partnered with MGM to bring the latter's movies to Xbox LIVE. Both of these partnerships aim to bolster Microsoft's Internet TV ambitions for Xbox 360. Already Microsoft claims more than 10 million Xbox LIVE members, so the content deals will undoubtedly make the Xbox 360 platform more attractive - especially as they are high-definition. The company boasted that it will have twice the on-demand content than any cable or satellite provider. Clearly Microsoft is targeting Apple TV, although Xbox 360 is also fighting a double front - with Sony in gaming. Xbox 360 registered 17.7 million consoles this holiday season, more than Microsoft expected.

Conclusion

Mary Jo Foley from ZDNet remarked that this year's Gates keynote was less futuristic. I actually see that as a good thing, because it means we're seeing more actual products and services. Sure, we heard the usual talk about Windows software "connecting people", enabling rich UIs, device integration, and so on. But the number of real living products on display, and the equally impressive roster of big company partnerships, shows that Microsoft is delivering circa 2008. Although you could also fairly argue that Vista is still far from a success story and Zune is the poor cousin of the iPod still. Not to mention the Windows Live branding debacle.

Overall though, Microsoft's attack on the Internet front is paying off - particularly with Xbox 360 and its various Internet TV initiatives. Mobile is starting to look stronger too, with leaked info about Windows Mobile 7 showing support for an iPhone-like gesture interface. And Gates said in his keynote that Windows Mobile got "over 10 million new users last year, and we'll double that next year."

Microsoft is talking the talk, after years of the futuristic fridge taking center stage. Now, a Web-enabled fridge that plays Xbox games while sharing music with the Zune - that would be something...

Top photo: Joakim Baage

Yesterday, we heard that Warner Music Group had teamed up with Amazon to offer its entire catalog DRM-free. They joined Universal music and EMI music, as well as 33,000 independent labels in pushing Amazon's catalog to 2.9 million tracks. That's still well short of Apple's 6 million or so tracks offered via iTunes, but Apple's DRM-free selection comes only from EMI. Warner and Universal have chosen so far to deal just with Amazon.

Amazon is starting to feel like a real threat to Apple's monopoly on the music download biz. They seem to have the cooperation of the music industry in offering DRM-free tracks, and their lower pricing (generally $.89-.99 per track) already forced Apple to lower its own DRM-free prices earlier this year.

Further, Amazon's MP3 store soft launched in September and has had little advertising. So far it has gained about a 3% share of the total market (more according to other reports) -- measly compared to Apple's iTunes -- but in just over a month, Amazon and Pepsi are planning a large Superbowl promotion to give away 1 billion free songs via the service. According to Billboard, when Pepsi offered 100 million free tracks via iTunes in 2004, just 5 million were ultimately redeemed over the 5 month promotion period. But since then, digital music has grown 416%, so it's a safe bet tht this promotion will be more successful. Could the Superbowl be a coming out party for Amazon in the music download business?

Additionally, Apple faces more competition in the digital media player market. Microsoft's Zune.net web site reportedly saw a 299% jump in traffic on Christmas day. Granted, Apple's iTune's store page still received 6 times the traffic, but the Zune.net numbers might be indicative of a strong holiday season for Microsoft's player.

Apple's iPod line still holds about a 70% market share (March), but that is down from over 90% just a couple of years ago. Better offerings from Microsoft, Sandisk, and other competitors are certainly putting a dent in the iPod's commanding position in the MP3 player market, albeit a small one.

Why Apple Will Continue to Rule the Digital Music Landscape

Even though it looks like a confluence of recent events is finally pointing to a weakening in Apple's digial music strangehold, the reality is that there still remains a long, long uphill battle for Amazon, Microsoft, and the rest. Further, in order to really take down Apple, both Amazon and Microsoft (or Sandisk, Creative, etc.) need to succeed. Apple has opened two fronts in this battle, iTunes and iPod, and in order to take them down, you have to beat them on both.

Too many people are already ingrained in the iTunes+iPod experience, and for many of them, DRM doesn't matter. They buy tracks on iTunes and put them on their iPods. As long as iPods control the player market, iTunes will control the download market. And let's not forget that Apple sells about 2 million DRM-free tracks of its own, so it has hardly sat on the sidelines while competitors have added copy protection-less tracks to their offerings.

Until the music player market shifts dramatically away from iPod dominance, DRM-free tracks will generally matter less to the majority of the MP3-buying public, who just won't be affected since they are using iPods. Once that happens, though, then all things being equal selection-wise (i.e., assuming the major labels working with Amazon eventually work with Apple as well to sell DRM-free tracks) and price-wise (which it is already), it likely comes down to buying experience.

The most intriguing prospect for that shift? The potential for an Amazon digital media player. Amazon began selling hardware late in 2007 with the release of the Kindle e-book reader, so perhaps an Amazon media player isn't so far-fetched. It would replicate the vertical integration of the iPod and iTunes store that has been a major part of Apple's rise to control over the industry.

Then again, as TheStreet.com points out, "with iPod satisfaction rates running at over a staggering 90%, and competitors like Microsoft failing to dent its market share, an Amazon-made device would likely struggle to dislodge Apple."

Conclusion

Eventually, Apple might lose some of its grip on the music download and media player industry. But while Amazon and Microsoft take baby steps in competing with Apple, the Cupertino, CA-based company is not standing still. Microsoft made positive changes to its Zune, but Apple released the iPod Touch (and updated the rest of the iPod line), plus signed distribution deals with Starbucks to deliver iTunes tracks over wifi in-store. Amazon signed two more major labels onto its MP3 download store, but Apple is already expanding into video rentals (i.e., onto Amazon's turf to compete with their Unbox service).

It seems likely that Apple's dominating position over the music download and media player markets will continue for at least a few years. What do you think? Is there and end to the iPod/iTunes monopoly in sight? Does Amazon, Microsoft, or some other company have what it takes to take on Apple? Let us know in the comments.