What I don't understand is, why Microsoft hasn't (That I have seen) tried to compete on the Zune's price with the iPod. Every time I've ever looked at a Zune, it has always been more expensive than an iPod. As stated, Microsoft won't be able to compete on the 'cool' factor. But essentially, what is a Zune or an iPod? It is the size and capacity of these devices that has always been a winner.
In New Zealand (Where Zunes aren't available), you can't really get a high capacity (Over say 8/16 GB) portable media player at a reasonable price, other than an iPod. So if you're after a large capacity, small portable media device, you'll look at your options:
1) Does it play MP3s? (And this would now be, Does it play video. h.264 MPEG-4 has won that battle, so don't try to fight a format war).
2) Which is the cheapest one that supports the features I want?
Microsoft needed to under cut Apple on the price. They have deep enough pockets.