With the official announcement of Zune HD, Microsoft may have the opportunity to crack the iPod's armor. Not that I think the Zune HD will be so wonderful, but because Microsoft currently owns the digital living room's eco system. Microsoft's foray and success into the gaming world, with the Xbox, gave them an opportunity to capitalize with a device designed to be connected to the internet and the TV. To Microsoft's credit they are capitalizing on this functionality with the ability to purchase music and videos, stream from NetFlix's online library (1 million Xbox subscribers), and access one's own media center content. Xbox 360 has accidentally turned into the living room media device Microsoft has been talking about forever and according to Silicon Alley Insider is "kicking Apple's butt".
What made the iPod, what it is today was not that it was revolutionary device (there were plenty of MP3 devices around), but the integration with iTunes. Although the iTunes application is not that great (still no multi user functionality), it made the process of purchasing and synchronizing your music with the iPod child's play. That simplicity was a key factor in popularizing the iPod. The same can be said about the X360 marketplace, it simplified the process of purchasing and renting HD content. In addition to its primary mission as a world class gaming console, the integration with Media Center allows the Xbox 360 to be the bridge between content stored on a PC and the TV. The Zune HD will be able to take advantage of this functionality to seamlessly integrate into the Xbox 360 eco system.
If you currently own an Xbox 360 and an iPod, the Zune HD maybe the next device in line, especially when you can convert the DRM free iTunes Plus content. I think the two remaining items Microsoft needs to do to insure the Zune HD's a viable Touch competitor is Xbox gaming as well as Windows Mobile application support. And, of course phone integration.