The Financial Times has a disturbing interview with Microsoft CEO Steve Ballmer if you're a Zune fan:

The Microsoft boss clearly has the competition on his mind. In a wide-ranging interview, he acknowledged the edge that companies such as Apple and Google have gained in important parts of the consumer business.

Apple’s iPhone and BlackBerry have "clear market momentum" in the smartphone market, one of the only consumer technology businesses that is set to resist the economic downturn this year, he said.

The downturn would not lead Microsoft to delay any new products or long-term investment plans, he added, though it had forced the company to take a close look at costs ... [He] acknowledged how far Microsoft is behind Apple in the digital music business ...

Mr Ballmer seemed all but ready to throw in the towel on the Zune mobile device, which has failed to gain ground on Apple’s iPod. But he suggested that the focus of competition in digital media was moving onto ground that Microsoft understands well: software.

He said that, with the market for dedicated portable media players in decline, the future lay in more “general purpose” devices – such as Apple’s iPhone and touch.

Asked if Microsoft would counter with a "Zune Phone", Mr Ballmer said: "You should not anticipate that." He added that the company would stick to its strategy of developing software to support a range of mobile devices. That suggests that, if there is a future for Zune, it lies in planting the software and online service linked to the player in other devices.

So there have been rumors of Microsoft porting the Zune software to various devices, including the Xbox 360 and smart phones. This isn't news per se. That Microsoft may abandon its Zune hardware, however, is somewhat alarming.

Regarding a Zune phone, I have heard that Microsoft will see a system called Zune Mobile, which would essentially combine Windows Mobile with the Zune UI and media playback capabilities, and that this system would be made available to customers via partners (as with Windows Mobile) and via Microsoft directly. Ballmer seems to refute that here.

Thanks to Aron S. for the tip.

UPDATE: Fear not, Zune fans. Microsoft says everything is just fine: Microsoft: We Are Expanding, Not Killing, the Zune