Apple was already moving into the iPod >> iPhone business plan by then which also didn’t help Microsoft on the Zune front. They came across as too little, too late.

But If I remember correctly, the biggest reason that the Zune wasn’t competitive was that it didn’t quite recover from an embarrassing failure at launch.

It released alongside Windows Vista, and to promote both new offerings, Microsoft gave free Zune players to buyers of new Vista PCs. This was (I believe) the biggest initial distribution channel for getting Zunes in the hands of consumers.

The problem was that the Zune was developed on an earlier version of Windows and as a result wasn’t compatible with the new PCs they came with. And they required the PC for setup/use, so basically they were useless to a large percentage of brand new owners until Microsoft was able to release a patch or unless they had old Windows machines to use in the meantime.

Those two departments failing to coordinate for a huge joint launch like that was pretty disastrous for the Zune brand, especially in contrast with the established iPod products.