Thoughts on the latest iTunes-iPod lawsuit
I have been ruminating for days over the antitrust lawsuit filed in California Dec. 31 charging Apple with monopolistic behavior in the digital music market. While the case looks weak, it also draws attention to some questionable Apple policies.
This suit came to light late Thursday when Information Week broke the story.
The suit accuses Apple of using its dominant position in the digital music market to stifle the competition in several ways. One way is the iPod’s lack of support for Microsoft’s Windows Media Audio format (and by extension its accompanying digital rights management), employed by almost all other digital music players and online download stores.
Another way Apple “locks out” rivals is its refusal to license the FairPlay DRM it uses in the AAC-formatted songs sold from the iTunes Store, so competitors don’t have the option of offering FairPlay-compatible devices or music.
After reading through the lawsuit myself, I must say I was astounded at the misinformation and exaggeration it contained. A few examples:
The suit on several occasions refers to how Apple’s behavior has restrained “what little competition remains in the digital music markets.” Although some digital music operations (both hardware makers and online stores) have scaled back or withdrawn, that sort of shaking out happens in every industry.
Furthermore, the struggles of a few have not discouraged new entrants on both sides of the market: Microsoft with its Zune player in 2006 and Amazon.com with its MP3 download store this past fall. If Apple had monopolistic control of the digital music market, new challengers would not dare enter it.
Apple in fact has plenty of competition. Consumers can easily avoid Apple’s products and services if they so choose. It’s been obvious for years that most choose Apple’s products because they like them better, not because they feel they have no choice.
The suit talks a lot about how iPod owners are “forced” to buy online music from iTunes, and that purchasing FairPlay AAC songs from iTunes “locks” that the buyer to the iPod, as the songs cannot be played on any other music player.
First of all, the aforementioned Amazon.com store sells MP3s with no DRM that can play on any player made by any vendor. For that matter, the iPod can play unprotected MP3s obtained from any source (including illegally).
Second, Steve Jobs said in his “Thoughts on Music” essay last year that only 3 percent of the music on the average iPod is purchased from the iTunes Store. Most iPods are filled with music ripped from the owner’s CD collection. Even the FairPlay stuff bought from iTunes can be burned to a CD and re-ripped back to a computer in a DRM-free format.
While the link between the iPod and the FairPlay music sold on iTunes does exert some pull in keeping customers inside the Apple ecosystem, it’s not as ironclad as the lawsuit claims. There’s a fence, but the gate is unlocked.
The suit further alleges that Apple’s monopoly control over the market allows it to “sell the iPod at prices far above those that would prevail in a competitive market.” If the iPod is so overpriced, it should be easy for rivals to undercut it by large margins on price in an effort to lure bargain-conscious buyers. But for the most part, Apple’s competitors sell their music players for about the same price as comparable iPods.
Yet as preposterous as this lawsuit is, it raises persistent troubling issues with the iTunes-iPod ecosystem. Apple may not be in violation of antitrust law, but its refusal to license FairPlay or make iPods compatible with Microsoft’s WMA format will continue to irk some consumers.
The most valid part of the lawsuit notes that many consumers, unaware of the competing DRM formats, could reasonably believe that all online music would be compatible with any digital music player, in much the same way they expect all CDs to play in any CD players.
Now I can’t blame Apple for not wanting to license WMA from Microsoft. Why would Apple want to pay its historic rival an annual licensing fee for a second DRM format (in addition to FairPlay)? There’s no benefit in it for Apple. Not to mention the irony of licensing a format for the iPod that no longer works in Mac OS X – that’s right, DRM-laden Windows Media files won’t play on a Mac. (The excellent Flip4Mac utility only works with unprotected WMA files.)
But why not license FairPlay? In his “Thoughts on Music” Jobs explained Apple did not want to license its FairPlay DRM because it feared that giving the code to other companies would increase the chances of it being leaked on the Internet and cracked by hackers.
That argument feels flimsy; Microsoft has licensed its WMA DRM for years. While it is breached from time to time, a patch has always followed fairly quickly. For that matter, Apple’s refusal to license FairPlay has not prevented it from being breached and requiring occasional patches.
I suspect Apple will keep its iPod-iTunes-FairPlay fence intact as long as it can. Its gaps give Apple a defense against these antitrust lawsuits, but its continued existence helps maintain the business model. Still, it smells just a bit unethical and not at all consumer-friendly – a trait Apple supposedly champions.
Of course, this entire issue will go away whenever DRM-encumbered music does. Business Week reported Friday that the last of the four major labels, Sony BMG, had agreed to start selling unprotected MP3s on Amazon’s online store. So far only EMI is selling DRM-free songs on iTunes, but now that Amazon has signed the others it could only be a matter of time before they all go DRM-free on iTunes. (Well, maybe not Universal…)
With no FairPlay and no WMA DRM music to worry about, accusations of “lock-in” will crumble. Apple almost certainly will continue to dominate the digital music industry, but its foes will need to find a new attack vector.
Comments
Why don't you look at this article explaining how apple is getting rid of the DRM from the top 4 labels and most independents are DRM free. http://www.appleinsider.com/articles/08/01/04/last_of_the_big_four_labels_to_offer_drm_free_music_tracks.html
Who the heck buys WMA music anyway.
Posted by: Nick | January 6, 2008 4:15 PM
The suit may have some credence if Apple had engaged in an existing open market and after gaining a large marketshare had subsequently locked consumers in but this didn't happen. They've had the current market model from day one and actually created the digital download market as it stands.
Both the iTunes Store & the iPod are extensions of iTunes jukebox software and have no obligation to work outside of it and support other systems especially as they've all failed.
McD
Posted by: McDave | January 6, 2008 8:34 PM
If people are after a real antitrust story. Try asking why the music labels are excluding iTunes from non-DRM digital music in favour of engaging a forced monopoly with Amazon. Apart from the probability that Apple wouldn't go back to MP3 as they moved to its second successor (AAC) before the iTunes store opened.
McD
Posted by: McDave | January 6, 2008 8:43 PM
WMA is a very poor sounding format, better that it not exist at all.
Posted by: Mat | January 6, 2008 8:48 PM
If European Union can penalize microsoft for $600 million for bundling media player with windows while there are many competing players in the market, this case has plenty of merit along the same lines. EU has requested from Apple to open iTunes to all media players or face penalties.
Posted by: GB | January 6, 2008 9:29 PM
Have owned ipods since 2003 (maybe 2002) and am a big fan -- but the fundamentals of the case are correct. Apple has employed monopolistic tactics.
The choice for playback remains mp3 or Apple's proprietary format. MP3 is (despite all the "it's a CD" talk) an indicator of illegal downloads. So Apple, with popular hardware, effectively gave the customer an Apple or illegal choice. 3% of songs on iPods means most people chose illegal over iTunes and CDs.
Sure Amazon has gone the DRM-free model --- but that's because Amazon has the clout to do so and was fed up of Apple's crazy demands in order for Amazon to remain an "authorized" Apple reseller. And look at how completely tedious Amazon's implementation is in order for a shopper to get the songs on to their iPod -- despite the fact that the songs are DRM free and cheaper on Amazon versus iTunes.
There's more to this claim that most shoppers might realize. I just bought an 80gb classic 2 months ago -- I have spent over $1500 on iTunes over the past 3 years.; And despite my love for Apple's hardware/software, the company is inherently monopolistic. Nothing has changed since the 80's! Apple's engineers rule! Their business team think the 5-year plan and send the company back to irrelevance.
So while I think this particular case won't succeed, I think the 80's will be repeated for Apple --- success + monopoloy at the start (i.e. early 2000's with the iPod). Then a company built on partnerships (amazon or microsoft) will beat them.
Seattle to win by many billions over Cupertino. Again.
Sucks.
Posted by: EM | January 6, 2008 11:31 PM
If a company has a monopoly competitors will still try to enter the market but will ultimately fail because of said practices. People do not realize that they can buy from amazon or any other store for that matter and have it work on their ipod/music player. Although I sort of agree with the EU/Windows media player comment I'm unsure where this one will go. By the way its only a matter of time before Itunes is a truly bundled player coming with Quicktime/Safari and these may become more of an issue. What is the percentage of Ipod sales to other portable music player sales (not video players)
Posted by: Chris | January 6, 2008 11:32 PM
Monopolies increase their market share over time. Apple's has been declining - still large but gradually declining for years. They started at a high proportion of the market because they were the first to market an mp3 player that most people could/would use. Lots of players preceded them, but were geek toys. Not hard for geeks to use, but tough for others. The iTunes music store emerged to provide legal downloads that people could/would use. DRM was required by the content managers. Other sellers of music preceded Apple, but was tough to use.
Apple's 'monopoly' persists because the competition just can't learn the lessons being provided to them ... they insist on keeping things tough, and tough never is popular - people buy, people try, and put the device to the side.
This is being played out again with the iPhone. Lots of chatter from phone geeks about what it didn't do. But what it does can be done by anyone. This gives it about 10x the effective features of other phones, because most people have only figured out how to make calls and answer calls on their phone, maybe take a picture and send to friends. They can do this, and lots more on an iPhone.
Posted by: Michael Fischer | January 7, 2008 12:09 AM
I read the same message from GB on another blog, almost word for word, but from a different name. You would think it would change a bit, but then cut and paste is a wonderful thing.
The EU wants the song download tie-in to the iPod to go away and it is, with the move to DRM-free music by the labels. So this EU tempest in a teapot disappears. The other issues that Denmark had with the iTunes store was legal language about refunds or some such stuff, and that the contract was in English, not Danish, if I recall correctly.
The California lawsuit seems like a ploy to slow down Apple and put FUD into the market, but I don't think it will work. I use iTunes but don't have an iPod and have never bought from the iTunes store. I have put CD's I own into iTunes and have downloaded podcasts for the most part.
No one is commanding me to buy an iPod, or buy stuff online. iTunes runs on Macs AND Windows, while WMA protected files will ONLY work on Windows. Microsoft can't even run WMA protected "plays fer shure" on its own Zune player. So why should Apple pay money to MS when MS doesn't even support their own product?
The major difference between Apple and the WMA licencees has been sales versus rental of music. Apple has consistently said NO to music rentals while almost all the other stores want to rent music on a subscription basis. eMusic, selling only non-DRM music has been pretty much the sole exception, not counting the Russian site selling by the bit.
As to the idea of not licencing Fairplay to keep it out of the hands of hackers, it is not a bad tactic. The fewer people that know the specifics of how it works, the better for Apple. A defence of the technology is multiple layers, not just one.
It is also Apple's technology and anyone who says they have to distribute it to others is nuts. In Microsoft's case of having to provide its code to others, it is a matter of providing missing API's to very specific code because of their being a convicted monopolist who put all kinds of road blocks and did illegal things to get their monopoly.
Apple simply built a better product that tied the ipod to iTunes and then added in a music store that treated the customer with respect rather than treating them like a thief.
I agree on the monopolist comment being one of the studios and trying to put down the iTunes store by not allowing them to sell non-DRM music while allowing Amazon to sell it. I can see a lawsuit coming down the pipeline from Apple against the big three studios for not providing access, perhaps not until in 2009 if this continues. It is after all either in "beta-testing" or still being negotiated.
Either way, if the lawsuit does not get thrown out of court, it will take a few years for it to wind its way through the court system. By the time it is done and over with, unless the current players do something better to compete against Apple, there likely will not be a lot of competition left, at which time Apple may well be a monopolist.
I don't see this happening as I see things going to non-DRM music that will play on anything. Any player and music store can then sell non-DRM music to iPod owners or any other player that supports the format they sell. I don't see anyone licencing WMA other than rental subscriptions of music.
So, interesting antics, but I don't see any merit in the lawsuit. The pundits will spin it to make it sound newsworthy, MS will spin it to their advantage, the MS-paid bloggers will trot it out to show how Apple is bad and I think consumers will just continue to buy innovative products that meet their needs, whether they come from Apple or elsewhere.
Posted by: Reginald W | January 7, 2008 12:38 AM
"The choice for playback remains mp3 or Apple's proprietary format"
AAC is not a closed format. It is based on the MP4 standard. MP3 also does not mean illegal. How you use a tool defines it's legality, or should I turn in my chef's knife since it is a very sharp 12 inch blade?
Posted by: adam | January 7, 2008 10:37 AM
GB, regarding your comment, mp3 is not an indicator of illegal downloads. mp3 is an indicator of a compressed & universally-accepted non-DRM'd file format. The first thing I did when I purchased an iPod was rip my CD collection for >>personal
Posted by: Court | January 8, 2008 10:16 AM