Microsoft has admitted that Apple's stylishly designed iPod has established a strong early lead in the music player and download market, but it thinks there is plenty of market left to play for.

Microsoft UK boss Alistair Baker told "The iPod is a good product and something that has captured the imagination of the market but the real game is going to be played later on."

"Microsoft has a very strong heritage in media, whether it is around audio, digital rights management or video handling. Apple's iPod is in the early adopter stage but there is a big market to play for. It will evolve dramatically and broadband is one of the catalysts."

Baker also admitted that players, such as Creative's Zen, will have to reduce in size to rival the compactness of the iPod. "We'd anticipate the hardware manufacturers will look at the design. There's a lot of money in consumer electronics going into building high-capacity, high-fidelity devices," he said.