Company already demonstrating the device.

Microsoft Corp. is developing a music and video device to compete with Apple's iPod and creating its own music service to rival Apple's iTunes, sources familiar with the plans said on Friday (June 16).

Robbie Bach, a rising star at Microsoft who headed development of the Xbox video game business, is overseeing the project, one source said.

The company has held licensing discussions with the music industry and is already demonstrating the entertainment device, the sources told Reuters.

Microsoft declined to comment.

The news comes a day after Microsoft founder Bill Gates announced he would ease out of a day-to-day role at the company he built into the world's biggest software maker.

Bach was promoted to president of Microsoft's entertainment and devices division after it was restructured in December. At that time, he wrote in an e-mail to co-workers, "While I will continue to play an important role in the games area, I will spend more time thinking about our broader challenges and opportunities across the division."

A Microsoft-branded music service would reflect a digression from an existing strategy to provide software for other such services, just months after the company announced a service called URGE with Viacom Inc.'s MTV Networks.

"It seems like a shift in strategy ... (Microsoft) is very committed to it," one source said.

Microsoft's software technology has provided the copyright protection framework for a number of subscription music services globally, some with well financed backers including Yahoo Inc. But Apple Computer Inc. remains dominant in the multimillion-dollar field of music and device sales.

Most iTunes rivals charge monthly fees to access a catalog of entertainment, but some allow consumers to buy single songs for about $1 each. Microsoft's service will emphasize the pay-per-download, or a la carte, model, sources said. A subscription component will also be offered, according to early accounts of the planned service.

One source, who has seen a demonstration of the service, said it was an improvement over iTunes.

"They have been developing technologies that have really good music discovery and community," another source said. "iTunes is the 7-11 (of music stores). You don't hang out there."

Microsoft joins a crowded field of competitors in the music service sector, including an entertainment device and service expected to be launched by Internet retailer Amazon.com Inc.

Amazon plans to heavily subsidize the cost of the digital device, much like wireless service companies do with the cell phones they sell, one source said. Some of the devices will come preloaded with music.

Microsoft earlier this year denied rumors that it was developing a hand-held video game device to complement its Xbox video game console.

It is unclear when Microsoft, based in Redmond, Washington, plans to launch the entertainments device and music service, the sources said.

Apple could not immediately be reached for comment.