Microsoft unveiled its Zune digital music device and service to great fanfare November 14, and already the fallout is being felt.

Few analysts expect the Zune, which has received tepid reviews, to have a significant impact in the near term. But by launching its own closed digital music system, Microsoft has eroded what little confidence was left in its ability to support PlaysForSure--its interoperable "ecosystem" of devices and services that uses Windows Media Audio digital rights management (DRM) software.

Already, both existing and incoming digital music providers are looking for alternate technologies to bring their services to market.

Sources say Amazon, which initially planned to launch a digital music subscription service and Amazon-branded portable music device likely based on Microsoft's DRM technology, has abandoned that model in favor of a DRM-free download service featuring unprotected MP3-formatted music. This is the third time the company was poised to launch a digital music service only to back away at the last minute.

Before Zune's launch, MySpace--which announced plans to launch a music service in early September--became another newcomer to the digital music space that has opted to do without DRM. And Yahoo Music chief David Goldberg has championed the need for DRM-free downloading for months.

MAJORS HANG TOUGH

Yet the major record labels continue to resist licensing their music to services that don't feature DRM protection, limiting these services to lesser-known tracks from independent labels.

Meanwhile, last month, Rhapsody partnered with SanDisk to install its own DRM technology--called Rhapsody DNA--into the new Sansa Rhapsody device. The Rhapsody service still supports other PlaysForSure devices, and the Sansa Rhapsody device is compatible with competing subscription music services. But the two work best together, enabling faster music transfer speeds and the addition of music recommendations from Rhapsody editors.

Rhapsody plans to include the DNA software in additional devices, and could eventually eliminate Microsoft technology altogether.

Even Microsoft's own PlaysForSure service, the MSN Music Store, is being phased out in favor of Zune. While the service remains operational, purchases are redirected to either Rhapsody or the Zune store, and eventually will be shut down completely.

Microsoft's decision to launch Zune as a closed service and the industry's reaction to it are symptoms of the PlaysForSure strategy's inability by itself to get the job done.

"Making the consumer experience the best it can be is our priority," Zune general manager of marketing Chris Stephenson says. "The consumer needs to know that their product is going to work. It's a buy-with-confidence scenario."

TECH TROUBLES

Stephenson admits the PlaysForSure system was supposed to do exactly this, but that the community has not yet "found its full footing." While PlaysForSure devices and services should work together in theory, frustrating integration problems often arise between them.

PlaysForSure partners blame Microsoft for providing faulty technology, with one executive calling its support program "awful." Napster, Urge, and Yahoo--like Rhapsody--are all working more closely with device manufacturers to provide better integration with their services.

"We don't think closed systems are the solution," Yahoo's Goldberg says. "We are working to solve all of users' needs, not just those with a particular piece of hardware."

Some partners hope that Microsoft will fix the bugs in its DRM technology now that it has to use the software itself for Zune. But there is also a good chance that new music services in the future will launch using a closed model similar to Zune and iTunes. Samsung, for instance, is prepping a music service designed specifically for its devices, and already wireless operators like Sprint and Verizon Wireless have introduced closed systems.

The music industry, however, has expressed concern about more closed systems at the expense of interoperability.

"We are no happier about the closed environment that Microsoft just announced than we are about Apple's," one major label executive says.

For the most part, though, Microsoft's customers are taking a wait-and-see, business-as-usual approach. Much of their reaction will depend on the Zune's success.

Microsoft would not reveal how many units it has shipped or its sales goals. The most aggressive forecast comes from ABI Research, which predicts Microsoft will sell about 500,000 devices by the end of the year.

But Microsoft's goal is to gain second position behind Apple Computer for both market share and mind share in the digital music race. According to data from the NPD Group, today's MP3-device market share race features Apple in the lead with 75 percent of the market, followed by SanDisk with 10 percent, Creative Labs and Sony at 2 percent each, and all others combined for 7 percent.

According to Jupiter Research analyst Michael Gartenberg, any success Microsoft has in reaching its goal will come at the expense of its existing partners.

"Whatever Microsoft gains is not going to come from Apple's (market share), but it's going to come from the other guys," he says.