(CNET) -- Slowly but surely, Microsoft's Zune is staking its claim as a legitimate alternative to Apple's iPod line of MP3 players.

Last year, Microsoft focused its efforts on overhauling the Zune's hardware and public image.

This year, Microsoft has turned its attention to improving the Zune firmware and desktop software, while updating the storage capacity and pricing of new models to stay competitive.

Design

The design of the Zune 120 is almost entirely unchanged from the Zune 80 we reviewed last year. The back of the Zune is now black instead of silver and the face of the player is covered with a glossy plastic that, although pretty, is more prone to smudges and scratches than the metal finish on last year's model.

We're happy to see that the increase in the Zune's hard-drive capacity doesn't translate into a thicker design. The Zune 120 measures the same 4.3 inches high by 2.4 inches wide by 0.5 inch deep as the Zune 80. Also, no changes have been made to the Zune's navigation controls, headphone jack, hold switch, dock connection, and 3.2-inch glass-covered LCD.

Considering Apple's strategy of altering its iPod design every fall (for better or for worse), it's a little unnerving to see the Zune's hardware design at a standstill. The upshot of the Zune's lack of design tinkering is that it maintains the product's compatibility with the handful of accessories designed for the player.

Features

The bulk of the third-generation Zune's improvements are found by flicking through its main menu. New menu items for Games and Marketplace have been added alongside existing selections for Music, Videos, Pictures, Social, Radio, Podcasts, and Settings.

The Zune's primary purpose as a high-quality portable music player hasn't changed. If anything, the enhancements offered by the third-generation firmware have bolstered the unique music-discovery and sharing features that have differentiated the Zune from the very beginning.

One of the more notable new features on the Zune is a Marketplace selection in the main menu that allows you to browse, preview, and download music directly from Microsoft's Zune Marketplace online store.

Within the Marketplace submenu you can choose between browsing Top Songs, Top Albums, and New Releases, or search for specific music by keying in a few letters. Songs can be previewed for 30 seconds with the option to add them to your virtual cart or purchase and download immediately.

By signing up for Microsoft's Zune Pass music-subscription service (a free 14-day trial is available), you can download unlimited music to your Zune for a flat fee of $15 a month. Otherwise, you'll need to purchase songs a la carte by setting up a payment account in the Zune desktop software.

Your Zune needs to be connected to a Wi-Fi hot spot in order to take advantage of the Marketplace feature. Fortunately, Microsoft has improved the Zune's ability to step through public Wi-Fi hot spots, and it's even struck a deal with fast-food giant McDonald's to have the Zune supported by the Wayport Wi-Fi hot spots found in many McDonald's restaurants.

If your local Wi-Fi requires you to enter a password, you can enter it manually using the Zunepad. The Zune will remember and associate your Wi-Fi passwords so that you'll only need to enter them once.

The Zune already had one of the best FM-radio tuners available on an MP3 player, including support for detailed station and song information by way of the Radio Broadcast Data System (RBDS). With the third-generation Zune, Microsoft has taken the RBDS-enhanced FM radio even further, by allowing users to tag the songs they hear so they can download them later.

The radio-tagging feature only works with FM-radio stations that broadcast artist and song information over RBDS (we found five compatible stations in San Francisco). Tagged songs are added to your Zune shopping cart, just as songs added using the Marketplace feature are, and can be downloaded directly to your Zune over Wi-Fi or previewed and purchased using the Zune desktop software.

The radio-tagging feature is fun to use, but in our experience, the stations that were compatible with RBDS were typically mainstream radio outlets with a limited amount of new music in rotation. Still, we're happy to see Zune giving users as many ways as possible to discover and acquire new music.

The addition of games for the Zune helps keep the device competitive against the iPod, but it doesn't compare with the quality of games we're seeing for the iPod Touch. Two games, Hexic and Texas Hold 'Em, are included with the Version 3.0 Zune firmware, with new games soon to come for the Zune Marketplace.

The audio, video, and photo features of the Zune are largely unchanged from the previous generation--which isn't a bad thing, really. The Zune's music player supports MP3, WMA, protected-WMA (Zune Marketplace only), WMA Lossless, AAC, and Audible audio file formats.

The inclusion of the high-fidelity WMA Lossless music format on a high-capacity player like the 120GB Zune should make more than a few audio purists very pleased, and the continued support for AAC opens the door for iPod converts (although DRM-protected iTunes purchases are still unsupported). Audiobook enthusiasts should be happy to see a new gadget for taking their Audible and OverDrive audiobooks on the go.

The Zune supports WMV, MPEG-4, and H.264 video formats natively at a DVD-quality 30fps frame rate. Windows Media Center users will be happy to know that the Zune also imports DVR-MS recorded-video content. Although the Zune's screen displays at a 320x240 resolution, video files stored on the Zune can be as large as 720x480 and played at full resolution through the composite-video output built into the Zune's headphone jack.

An optional Zune AV dock can output video using a higher quality component cable. Unlike the iPod, the Zune's built-in video output mirrors its onscreen display, which means that all of the Zune's features (including menus) can display on your TV.

Selecting the Social feature from the Zune's main menu gives you a window onto your friends' (or total strangers') listening habits. Within the Social menu, you have an Inbox for messages and friend requests between Zune users, a Friends tab displaying any current Zune users you've befriended through Microsoft's Zune Social network, and a Nearby tab that detects the Wi-Fi signal of other Zune's in physical proximity to you.

You can dig deeper into the Social to preview and purchase the recent or favorite songs of people in your network, piggybacking on your friend's music tastes the same way you might with an online service such as iLike or Last.fm.

We're all in favor of getting music recommendations from friends, however, the slow adoption of the Zune means that your actual friends are nowhere to be found on the Zune Social, requiring you to befriend Zune-using strangers in an effort to make the Social feature feel useful. Having used the Zune Social for the past year, however, the pseudo-friends forged in the Social have routinely provided some surprisingly good music recommendations.

If you're a fan of audio and video podcasts, the Zune is one of the only alternatives to the iPod that provides integrated, hassle-free management of your podcast feeds. Like the iPod, the Zune's closed software and hardware ecosystem is able to automatically download new podcasts, load them onto your Zune, and clear out the old content.

The Zune desktop software allows you to browse, search for, and subscribe to podcasts within the Marketplace directory, or paste in the direct link for the feed. Podcast playback on the Zune supports autoresume, episode information, and the ability to unsubscribe from podcasts directly from the playback screen.

Finally, if you're a Zune Pass music subscriber, Microsoft has added a new feature called Channels that offers a podcast-like automatic rotation of new music playlists for your Zune. Channels are sorted by genre, affiliation (Grand Ole Opry, Fader Magazine), or type (Billboard Top 20), and content is updated weekly.

If you don't hold a Zune Pass subscription, you can still subscribe to Channels and hear 30-second song previews of any of the music included on the playlist, with the option to purchase tracks a la carte. If you've been waiting to bite the bullet on a Zune Pass until it seems like a better value, Channels offers an appealing way to inject new music onto your Zune every week without you having to lift a finger.

Zune desktop software

It wasn't pretty when Microsoft overhauled its desktop software alongside the release of last year's Zune. Thankfully, the upgrade to Version 3.0 has brought nothing but improvements and stability to the Zune's desktop client.

The software runs noticeably faster on our old Windows XP machine and includes menu settings that allow you to throttle the software's graphic performance to match the capabilities of your computer.

The latest software hasn't made any radical visual changes, but there are a few subtle enhancements. The software's background image is now white (goodbye pink swirls); there's a new Picks tab under Marketplace with personalized recommendations; your Zune Social card has now been integrated better; and the Now Playing screen offers an enhanced view with tastefully treated artist photos that float and fade like a custom screensaver.

The most interesting new feature included on the Zune 3.0 desktop software is a Mixview pane that graphically represents the currently playing song in relation to similar artists, songs, and top listeners. Using Mixview, you can explore the connections between artists, preview similar songs, and acquaint yourself with other Zune users, in a way that is much more visually engaging than the storefront design that permeates iTunes and Zune Marketplace.

The Zune software is far from perfect, however, and still lacks the fine-grain control that users can find in iTunes, Windows Media Player, and Winamp. If you're a power user, yearning to outfit your metatags with lyric data or import your FLAC music files, the Zune software isn't the place for you.

Unfortunately, the Zune hardware is only compatible with Zune's own desktop software, so if you can't stand the software's deliberately vanilla approach to music organization then you may want to consider another MP3 player.

Performance

The Zune's audio, video, and battery performance haven't budged since last year's model. Microsoft rates the Zune 120 at around 30 hours of audio playback and 4 hours of video. When our CNET Labs tested the Zune 80 last year, they found the numbers for video to be spot-on, but audio playback came in at 22 hours with Wi-Fi off, and 18.5 with Wi-Fi on. We'll have our Labs test the Zune 120 to see if there have been any changes in battery performance and we'll update this review with the results.

Despite its lack of EQ controls, the Zune 120 sounds amazing over a good pair of headphones. Unfortunately, most users won't hear the difference now that Microsoft decided not to bundle its quality in-ear headphones with the player. Instead, the Zune 120 box includes an attractive, yet average-sounding, pair of earbuds and the higher quality in-ear headphones are sold separately.

Video quality on the Zune 120 is unchanged, however, it's still one of the best video podcast players you can buy (the iPod Touch, with its larger screen and video-zooming feature, is even better).

Zune vs. iPod

The Zune still has a hard road ahead if it wants to catch up to the iPod. Microsoft is doing an admirable job, however, of carving out a niche of music fanatics who value the Zune's emphasis on music discovery and subscription-music gluttony. When it comes to high-capacity MP3 players, Apple and Microsoft are the two best options available, offering comparable features, file support, and audio quality.

But, unless you have a grudge against Apple or are tempted by the Zune's subscription-music service, the iPod's superior battery life and accessory options make it a better option for most users.