There are rumors that Microsoft is exploring making the Zune free with subscription to be more competitive with the iPod. On the surface, who doesn’t like free but exactly how free is your “free” cell phone?

If anything, it will hasten the demise of the Zune and Microsoft:

1) Not that Zune has established much of a brand value but this will essentially drive it to nothing and you can give up hope of ever making any other Zune brand extension product (as MS has talked about a Zune phone) because unless you sell very cheaply or give it away free, you have already told consumers your brand value is ZERO so why would they want to pay more than that?

2) An mp3 player is not the same as a cell phone. There’s very little you can do with a cell phone without service. Unlike an mp3 player which does not require you to log in to use, all you need is a charger & your own music – so once it’s in your hands, you don’t need MS anymore. You can also hack it to use as a portable hard drive or you also have hardware components you can break down to sell – nothing much of eBay value in a cell phone broken apart.

3) The only way MS can protect itself is to sell it to you for $250 with a two contract (or a similiar price if not more) and rebate you $10 a month. So much for simplicity in listening to music. So, to reiterate. You buy a Zune for $250. You spend hours a month assembling playlists, they rebate you $10 a month – in 2 years, the Zune is yours “free!” So much for simplicity in music – if your Zune gets stolen and doesn’t log in every month to register, do you lose your $10 a month in rebate? Does MS try instead to create you 15 cribbit MS Live points (it’s fun!)? Are you willing to commit $250 in hopes you like subscription music? Does it sound like it’s less work just to start up your own band and buy an ipod instead?

4) The weasel factor. Not only is it a lot of work on your part – but with all the conditions, you realize it’s not really “free free,” so don’t you just create more resentment for the brand – like rebates? Who thinks BETTER of a company with rebates or do you think – weasel mofo’s – why don’t you just give me a coupon or lower the damn price?

5) The subscription market is a capped marketplace. There is a limited number of people who are interested in playing radio station programmer for tracks they want to listen but NOT to own? People are too lazy to make playlists for music they own, it’s now proven with 10 competitors and all sorts of pricing, people just don’t care that much about subscription music. There are less than 3-million users in the US and that hasn’t changed any whether Yahoo dropped the price to $7.99 a month or when SanDisk offered a free player with a subscription. Like a free Zune, 2-million tracks a month for $9.99 or $14.99 sounds enticing until people realize it’s not theirs to keep – why not go with satellite radio, professionally programmed? Free radio over the airwaves, free internet radio or free legal downloads? Because if you like the song – you’re probably going to want to buy it anyway, right?

6) You know MS will insist on streaming you ads.

7) It will be a huge cash drain. Because it’s giving away real value ($200 hard costs hardware) today in return for $5 a month back (minus the royalties paid out) and hoping and praying you buy dozens of tracks a month (as with itunes store users, we know that’s not happening). The numbers don’t really add up – plus, you have to create a whole new department to track and bill these people – resolve issues if you’re rebating people, etc … so it’s more like $300-$400 out the door today in hopes you’ll make back $5-$10 a month. The numbers don’t add up. Unlike a cell phone bill which is $40 minimum to a max of hundreds a month because what else are you going to wth a cell phone? Unlike an mp3 player in which you can load your own tracks.

8) Unlike the cell phone companies, their giveaway and brand value of zero is NOT for their service but for the 3rd party phones – in which they have no stake in. They could care less if the value of a Moto RAZR has gone from about $400 to essentially zero in the consumer’s perception. Moto is NOT their brand – if anything, it helps their leverage with Nokia, Samsung, LG, etc … And as a consumer, in your mind – anything about $49 for a phone is “expensive,” because cell phone manufacturers let cell providers tell people their product is “worthless” and disposable. (Obviously something Apple wants to change). The problem with Zune is the player and the service is theirs so when you say the player is worthless, by the same branding, you have also branded and valued your Zune service as worthless.

9) You also gather up the least loyal customers possible and bargain hunters by giving away “free.” They are only there because they think they can job the system and will abandon you at the drop of a hat when you are no longer the cheapest – you just have to look at KMart or Dell. Yes, cheap will drive some sales but your customers have the loyalty of a tse-tse fly.

10) Shareholders have to wonder how many other businesses they will be getting into where they give away the farm and get a moth eaten moth in return. MS’ cash reserves have dropped from $64 billion to $29 billion to prop up BG’s & SB’s stock holdings for another boondoogle and it’s not like MS doesn’t have recent history to see why it doesn’t work – MSN tried to take on AOL as a dial-up ISP in the early 2000’s by offering a $400 rebate if they signed up for 18 months – this cost MS about $4 BILLION dollars and they lost to AOL (of all people) and eventually switched back to just a portal/search.

So, will MS do it? Probably – logic, history and a business sense plays a small part in their consumer products division. So, what if they failed at home networking, WebTV, MSN, watches, Talking Barneys, etc … after all, it’s just money.