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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.

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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.

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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 Although some digital music operations (both hardware makers and online stores) have scaled back or withdrawn, that sort of shaking out happens in every industry.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.)

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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.

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