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Microsoft Chairman Bill Gates with KEXP's John Richards at the 2006 Zune launch in downtown Seattle.

Microsoft is finally pulling the plug on its dedicated Zune hardware but planing to keep the Zune music software running on Windows Phone and other devices, according to a source quoted this afternoon by Bloomberg News.

Microsoft is expected to continue selling the existing Zune devices but won’t create or sell new ones, according to the Bloomberg report.

The decision comes less than five years after Microsoft launched the device in competition with Apple’s iPod. The latest version of the hardware, the Zune HD, was well-received by fans. However, the company never gained the type of market share that would have made it a serious player in the market.

[Follow-up: Fond memories of Microsoft Zune … in brown, of course]

With the release of Windows Phone 7 last year, the Zune highlighted a fracture in Microsoft’s development platform, as apps weren’t compatible between the two devices. Separately, the Zune music and video service is also available on Microsoft’s Xbox Live online service on the Xbox 360.

The Zune devices had more personality than the typical Microsoft product, including the sly “Hello from Seattle” message in the body of the device.

Business Insider has a summary of the Bloomberg report, which doesn’t yet appear to be available online. We’ve asked Microsoft for comment, and we’ll update this post depending on the response.

Update: Here’s the Bloomberg report.

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