Microsoft 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.

According to Reuters, Robbie Bach, a rising star at Microsoft who headed development of the Xbox video game business, is overseeing the project.

The Redmond, Washington-based company has held licensing discussions with the music industry and is already demonstrating the entertainment device.

The news comes one 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 the company'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 services, just months after the company launched a service 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 . But Apple Computer 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 individual songs for about $1 each. Microsoft's service will emphasize the pay-per-download, or a la carte, model, the 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.

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 plans to launch the entertainments device and music service, the sources said.