Microsoft sees room to challenge Apple's iPod

The digital music player market will eventually mushroom to hundreds of millions of units a year -- up from a current rate of 30 to 40 million units per year, said Bryan Lee, corporate vice president of Microsoft's entertainment and devices division.

Microsoft plans to heavily promote the wireless capabilities on its new digital music player, Zune, in order to position the device as an alternative to the iPod, which currently lacks wireless functionality, Lee said.

"We want it to be the best music experience you can have," he said at a Citigroup investment conference that was broadcast over the Web. "You'll see a lot of emphasis on community, a shared type of experience."

The Zune, which is slated for release later this year, faces a tough battle against the iPod. Apple holds more than half of the digital media player market, according to research company NPD. In the United States, the iPod has more than 75 percent of the digital music player market, according to NPD.

Microsoft has had success in building a community to drum up interest in hardware products. It adopted a similar strategy for its Xbox video game console, using a service known as Xbox Live to allow users to play games with one another over the Internet.

Redmond, Washington-based Microsoft last month said that the Zune will be manufactured by Japanese electronics maker Toshiba Corp., which makes a competing product, the gigabeat.

In a filing last month with the U.S. Federal Communications Commission, Toshiba said that the new device will come with a 3-inch liquid crystal display screen, a 30-gigabyte hard-disk drive, FM radio tuner and wireless connectivity.

Lee declined to provide more details of the new device's design, saying that more information will soon be released.

Microsoft shares fell 16 cents to $25.68 in late-afternoon Nasdaq trade.