Video-game retailer GameStop has decided to stop selling Microsoft’s Zune players at its stores due to what it sees as insufficient demand from customers.

“We have decided to exit the Zune category because it just did not have the appeal we had anticipated,” said a GameStop spokesperson. “It (also) did not fit with our product mix.” GameStop made the decision about a month ago. GameStop said it will sell Zune players online until it clears out its inventory.

GameStop has hundreds of stores across the country and losing that distribution channel could hurt Zune sales. Many of GameStop’s customers are avid users of Microsoft’s Xbox 360 console and could have presented a cross-selling opportunity for Microsoft.

Microsoft said that the Zune player continues to be carried by other retailers. “We have a set of great partnerships that give Zune a strong presence at retail including Best Buy, Target, Wal-Mart and others,” said Adam Sohn, director of marketing for Zune, in a statement. “We will continue to invest in retail partnerships and have seen good momentum online and at retail over the last few months.”

The decision to stop selling Zunes took a toll on the company’s margins in the first quarter. Gross margins for the quarter were 26.1%, down from 27.2% the same quarter year before, reported GameStop on Thursday.

Microsoft is quickly working behind the scenes on its Zune MP3 player. Microsoft has modest expectations from the player and is expecting for it to pass the one million shipped mark by June 2007.

The first Zune will soon get two new colors. The first color is Baby Pink. And only 100,000 will be produced. A second new color, Watermelon Red, will be released after Baby Pink.

The Zune 2.0 will be similar in design to the original Zune but will be slightly thinner and will come with a larger HDD. The second new Zune is the highly-anticipated “Flash Zune.” A flash-based Zune player is exactly what Microsoft needs to compete with Apple’s popular Nano and Shuffle, so it comes as no surprise that the Flash Zune is in the pipeline.

The Flash Zune measures 3″ x 1.25″ x 0.25″. The flash MP3 player will have integrated WiFi and will be available in capacities equal to 2G.

Also of note is that 2.4 million Zunes will be manufactured during calendar year 2007 and 75% of those will be of the new Flash Zune.

Microsoft has confirmed plans to release an MP3 player on the market. The hardware and software packages will all be launched under the brand name Zune. Microsoft said it will use a hard drive, wi-fi and owners will be able to buy tracks that are downloaded direct to the device.

The first Zune player will appear in late 2006.

Reports from around the Web suggest that Microsoft is moving a secret internal project on which I’ve been briefed into the product development stage. If true–and I have no reliable information to suggest it is–Microsoft will go head-to-head with Apple’s iPod in the portable MP3 player market as soon as this holiday season. Here’s what the rumors reveal.

A report in the “Seattle Times” says that Microsoft’s MP3 player is codenamed “Argos” after the ship that Jason and the Argonauts used to pursue the Golden Fleece. It’s being developed by people from the Xbox team, and led by J Allard, an Xbox team cofounder. According to Times reporter Brier Dudley, Microsoft is firmly behind the new player and has committed “hundreds of millions” of dollars to its development and marketing.

Various reports say that Microsoft’s Argos player will be in the market as soon as this holiday season, which is amazingly aggressive since my own sources tell me that the software giant was using it internally as a reference design for partners until fairly recently. It will allegedly include Wi-Fi capabilities so that users can download content from the MTV URGE online service without being connected to a computer, a large widescreen display, a simple iPod-like user interface, and possibly even video game features.

windowsitpro.com

Microsoft developing new MP3 players at challenging the dominance of Apples iPod MP3 player.

The Microsoft founder, Bill Gates, praised Apple’s iTunes music store and said the software giant was talking with hardware partners to create media devices that can be less expensive and easier to connect and can handle pictures and video better.

Gates said the market share for digital music players compatible with Microsoft software is around 20 percent, a figure that is lower than he would like.

In an interview with Newsweek, Apple CEO Steve Jobs says: “The problem is, the PC model doesn’t work in the consumer electronics industry, where you’ve got all these companies and some does one thing and another does another thing. It just doesn’t work. What’s going to happen is that Microsoft is going to have to get into the hardware business of making MP3 players. This year. X-player, or whatever.

You’ve got to admit, picking 14 million in the spring of last year, when the most you’ve ever sold was four and half million, was a pretty big bet,” Jobs says.

The interview also takes a look at Apple’s Macs and the company’s move to the Intel processor, with Jobs discussing the reason Apple used its first ever processor, the 6502: “We used it because Apple co-founder Steve Wozniak got one for free,” he explained.

macworld.co.uk