Microsoft is developing its own handheld music and video player to take on the iPod

You didn't think Microsoft would sit on the sidelines forever as its longtime rival Apple Computer grew into the 800-pound gorilla of portable music, did you? After years of allowing other manufacturers to make MP3 players that used its software, Microsoft is developing its own handheld music and video player to take on the iPod, according to a report in The New York Times.

And it will have at least one thing the iPod doesn't: WiFi capabilities that would let users download music without connecting to a computer.

The unnamed device is expected to be in stores by the holidays, and would also have a more advanced video screen than the iPod, according to unnamed executives who spoke to the Times. In another bid to rival Apple, Microsoft is in the midst of negotiations with major record companies and some TV networks to reach an agreement that would allow it to sell music and video content online through an iTunes-like download store.

Bloomberg News reported that Microsoft has hired music industry executive Chris Stephenson to meet with music and movie companies to seek licenses for their content. So far he's talked to the EMI Group (Beatles, Coldplay, Gorillaz) and Universal Music Group (Ashlee Simpson, Fall Out Boy, Jimi Hendrix), as well as NBC, Fox and CBS, according to the report.

Though Microsoft has licensed its software to companies including Samsung, Sony and Creative Technology for use in portable MP3 devices, the new player would be its most serious challenge yet to the iPod, which has more than 75 percent of the digital player market, to go along with the 72 percent of the digital download market held by iTunes.

Experts said the decision to develop its own device is a sign that after six years Microsoft is no longer content to let other companies try to cut into Apple's seemingly insurmountable lead. "If this is true, then this is them trying to take more control over the situation," Mike McGuire, vice president for research on mobile devices at Gartner, which tracks the electronics market, told the Times. "In effect, they're basically saying, 'We think we can do something better' " than existing hardware manufacturers.

A Microsoft spokesman declined to comment to the Times on the report, but a senior executive at a major TV network said that even though Microsoft had not yet received commitments from the networks to supply programming to the online store, they were open to working with a rival to Apple's iTunes, which has been criticized by the music industry for refusing to offer multi-tiered pricing in favor of 99-cent per-song prices across the board.

Bloomberg reported that Microsoft's device is being developed under the eye of Robbie Bach, head of the unit that produced the Xbox game console, the software company's most significant — and successful — venture into building its own hardware.

For complete digital music coverage, check out the Digital Music Reports.

— Gil Kaufman