Microsoft’s move to create its own-brand digital music player and services may hurt its existing partners more than it impacts against Apple’s iPod, an analyst warned Monday.

American Technology Research analyst Shaw Wu warned that Microsoft’s debut in the market will put it into direct competition with its partners.

“We believe Microsoft’s action could also make partners think twice before deciding to work with the company on future projects. We view its entrance into portable media hardware as akin to a civil war, much like if it entered the PC hardware market to compete with partners Dell and HP.”

User experience is critical

He also warns that matching the iPod/iTunes user experience will be a challenge.

Additionally, Wu points out that Microsoft may feel a financial impact as it tries to create a market for its Zune products.

“While most view the Xbox as a success, we believe it has been a failure financially with its billions in losses with profitability likely a few years away, if at all. If it were any company other than Microsoft, we believe the Xbox would have been shuttered due to its being highly unprofitable (Microsoft lost $437 million in its recent June quarter). We believe its effort in portable media will likely see similar economics.”

IPod is Walkman of the age

The analyst stresses his belief that Apple’s music products and services are set for a Walkman-like period of market dominance. “Walkman maintained its dominance over a 15-20 year period despite countless competitors trying to create a ‘Walkman killer,'” he notes.

Even if Microsoft manages to salvage relationships with its existing partners, create a compelling user experience, and is prepared to exercise its financial muscle to penetrate the digital music market, challenges still remain.

Apple already has a strong selection of third party accessory makers for iPods. It also holds a 58 million strong iPod user base and 300 million iTunes users. Consumers have already made an investment in Apple’s products, with over one billion songs and 30 million videos already sold.

Wu continues to recommend clients buy Apple stock.

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