Microsoft a few years decided to step into the field of consumer electronics in a limited way, with efforts for both gaming consoles and MP3 / Media players. Both of these are fast moving items, with fierce competition, an extreme focus on features, and ability to turn users into die-hard fans. In both these areas, there were entrenched players in the field when Microsoft made its entry - in gaming consoles, Sony's Playstation and Playstation 2 (and Nintendo in a smaller way), as well as Apple's iPod in the field of MP3/ Media player were both established players with very strong market shares.
Microsoft on the other hand has a very strong marketing strength, as well as presence in the customer software segment; however, Microsoft had to build up a mind and market presence in the actual consumer devices retail positions. This takes time and effort, and you need to show increasing market share. This has now suffered a setback, with one of the leading retailers, GameStop deciding to stop stocking the Zune (Microsoft's personal media player) due to inadequate sales:
Microsoft's entry into the consumer electronics space came with a thorny channel problem. To succeed in capturing a broader audience, Microsoft had to broaden its retail channel. The Xbox business helped take care of that problem: once Microsoft proved that it was serious about developing and promoting the first Xbox, and once it began to show reasonable sales figures, a new class of retailers--including game-specialty stores like GameStop--were happy to make shelf space for Microsoft's consoles and games, right alongside Sony and Nintendo.
Apparently, after giving it a year and a half, GameStop has found that's not the case. Looking at recent NPD figures, it's easy to see why--compared with the first Xbox, the product just isn't moving nearly as many units (2 million in 18 months) or capturing enough market share.
Still a bit early to write off the Zune, but it just is not capturing any imagination, and in the meantime Apple has moved ahead with the iPod Touch / iPhone, capturing the wow effect.