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iTunes, DRM and competition law

This page is for updates, comments, corrections and other material relating to Reckon's September 2004 article The iTunes Music Store: does competition law hold the key to a closed shop? (4 pages, PDF). The article, summarised below, considers the scope for EC competition law to be used to address barriers to inter-operability between music downloads and the iPod.

This page also includes some information on a referral to the European Commission of an excessive pricing complaint from the UK relating to the differential pricing for the iTunes Music Store to users in different European countries, and a list of links to related material available online.

iPod inter-operability and EC competition law

DRM-free music from iTunes Store, 2 April 2007. Apple announcement that EMI's catalogue will be availalble on the iTunes store without DRM protection and at a higher bit rate from May 2007. The unprotected 256kbps version will be sold in parallel with the FairPlay-protected 128kpbs version, with a 30 per cent price premium.

Update: The non-DRM option is branded iTunes Plus. The price premium was removed in October 2007.

Steve Jobs article on DRM, 6 February 2007. Steve Jobs, Apple's chief executive, has published an article on DRM on the Apple website. He argues that licensing FairPlay would create serious risks that the DRM would be breached, because "a DRM system employs secrets. There is no theory of protecting content other than keeping secrets." Furthermore, a greater variety of devices using FairPlay technology would place barriers to the effective implementation of patches in the event of a breach. He points to the DRM security requirements imposed by large music companies as the reason why FairPlay licensing is not practicable for Apple. Highlighting the fact that the big four music companies are in large part controlled from Europe, where most of the pressure for FairPlay licensing has come, he encourages those who argue for inter-operability to convince them to license their music for online distribution without DRM, which Apple would "embrace wholeheartedly". "If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store."

French implementation of the copyright directive. A copyright bill has been going through the French parliament to implement measures necessary for France to comply with Council Directive 2001/29/EC on "copyright and related rights in the information society". Article 6 of the directive requires legal protection to be provided to DRM systems. The adopted text (in French) provides that DRM measures for which the law prohibits circumvention must not prevent inter-operability, and establishes a new regulatory body (Autorité de régulation des mesures techniques) with powers to require DRM publishers to provide information enabling inter-operability. But it appears that a DRM provider does not need to provide inter-operability information if copyright holders for all the protected material have directed that inter-operability should not be provided for their works. In the lower house stages of the bill, an opposition amendment was passed in December 2005 to place peer-to-peer file sharing within the private use exemption, subject to the payment of a subscription to a copyright collecting society (licence globale). This was subsequently reversed. More information in French from from the lower house and from the upper house.

Further evidence that Fairplay is not indispensable? Playlist reports (22 November 2005) that another (US) company has declared plans to reverse-engineer the FairPlay encoding system to enable online music retailers other than iTunes to sell iPod-compatible music downloads that are DRM-encoded by early 2006. The article also confirms that Real has fixed its Harmony system, discussed in the Reckon article, which had been disturbed when Apple upgraded its technology.

Apples denied motion to dismiss US antitrust case. As reported back in January 2005, a US customer (Slattery) of the iTunes Music Store is suing Apple Computer, alleging that Apple has infringed antitrust laws by allowing iTunes to work only with Apple's iPod music player. AppleInsider reports (15 September 2005) that at a District Court hearing on 9 September 2005 the judge dismissed some of Slattery's claims, including two claims of attempted monopolization (although it granted Slattery a month to amend the two arguments). But the judge denied Apple's overall motion for a dismissal in the case, allowing Slattery to proceed with seven of his ten original claims. It is report that these include "allegations that Apple possesses monopoly power and has coerced customers into purchasing both iPods and iTunes files" and that "Apple has violated state law under the Cartwright Act and California's unfair competition law".

Another hack — or "the fair interface to the iTunes Music Store"? Ars Technica reports a new way of circumventing the iTunes Music Store's FairPlay DRM. Apparently Apple relies on client software to wrap downloaded music in DRM, and a custom client masquerading as iTunes is able to download unprotected tracks from Apple's servers.

Another French challenge. CNET reports that Apple and Sony are being sued by a French consumer association over their closed DRM systems. According to the Register, "UFC-Que Choisir wants the two companies to open up their music stores to other device makers and to cough up €30,000 ($38,595) in compensation".

iTunes customer sues Apple under US antitrust law. CNET reports that a US customer of the iTunes Music Store is suing Apple Computer, alleging that Apple has infringed antitrust laws by allowing iTunes to work only with Apple's iPod music player. Although the case is under US antitrust law, the issues raised in Reckon's September 2004 article (PDF) and in the French abuse of dominance case (see below) are likely to have some relevance. Arts Technica comments on this case, arguing that such an antitrust suit is unlikely to be successful, and that a better approach lies in challenges to the US Digital Millennium Copyright Act (DMCA).

Apple upgrade breaks RealNetworks/Harmony. In the US, iPod users have been able to purchase iPod-compatible music downloads from RealNetworks, as well as the iTunes Music Store. RealNetworks' music download service exploited its Harmony technology that was able to work around Apple's use of proprietary DRM technology (this previously prevented the direct use of DRM-protected downloads on the iPod device unless these were purchased from Apple). But it seems that Apple is using software upgrades on the iPod to restrict the ability of iPod users to use downloads from RealNetworks. ZDNet reports that Apple has "confirmed that the software released with its iPod Photo will not play music purchased from RealNetworks' music store". For fans of interoperability, this is another set back after the French competition authority rejected a complaint that Apple's policy was an abuse of competition law (see below).

Decision on French FairPlay access / abuse of dominant position case. The French Conseil de la Concurrence has rejected the complaint by VirginMega over Apple's alleged abuse of dominance. The decision of 9 November 2004 can be found at:
http://www.conseil-concurrence.fr/pdf/avis/04d54.pdf.

It appears that the Conseil could not exclude the possibility that Apple held a dominant position on a relevant market for portable digital music players with hard disks and DRM capabilities, and/or a dominant position in a relevant market for downloadable music (which in all parties' view would not include the supply of music on CD). However, it took the view that the only conduct potentially subject to the control of competition law would be a refusal to grant access to FairPlay as an essential facility, and found insufficient evidence that FairPlay was an essential facility, for the following reasons: only a small proportion of downloadable music is used on portable players such as iPods, which is the only case where DRM incompatibilities could prevent a choice of supplier; and CD-burning provides an adequate workaround to DRM incompatibilities (see the Reckon article). The decision also notes the availability of portable players compatible with Microsoft's WMA DRM as a reason to doubt FairPlay's indispensability for music download retailers, and points out a number of commercial reasons other than FairPlay for the success of Apple's iTunes Music Store. It also records the lack of evidence that there is no objective justification (such as security or cost of providing software updates to third-party licensees) for Apple's refusal to licence FairPlay. As the grounds for rejecting the complaint was lack of evidence, the case may be re-opened in the future if parties provide new relevant information.

A summary of the decision is provided on the website of the law firm Bird & Bird.

Relevance of Commission's decision on Microsoft interoperability. The European Commission's decision (PDF) in the Microsoft Windows 2000 case addresses abuse of dominance in the context of the refusal to supply/license information that would allow inter-operability between work group server operating systems and client PC operating systems. In its decision (at paragraphs 578 to 584) the Commission emphasises that the refusal to supply "involves a disruption of previous levels of supply", in which Microsoft lowered the amount of relevant information it supplied.

EC market definition findings on music downloads. The EC has published its decision in the Sony/BMG case (PDF) (the day after the Reckon article was published). The decision takes a similar approach to the definition of markets for music downloads as the decision in AOL/Time Warner discussed in the Reckon article. Although the Commission maintains a distinction between the supply of music online and the supply of CDs, various aspects of market definition are left open because the Commission did not find these decisive in reaching its decision.

Legality of CD-to-iPod transfers. It has been pointed out that, whilst the law may not be entirely clear-cut, it is not established that UK law allows one to copy content from a (legally-purchased) CD to the iPod (cf. paragraph 5 of the article which picks out the "legal" routes through which iPod users can obtain content). In contrast, this seems to be legal in France and various other EU countries. This has an interesting impact on the market definition question in the UK. If UK iPod users nonetheless consider CDs as substitutes for downloads — possibly because the probability of legal action seems low, and because there may be a low "guilt factor" from such activity — the relevant market could well be defined to reflect consumer substitutability between legal and illegal means of obtaining content for iPods. In that event, even if the iTunes Music Store were not considered to face competition from fully legal sources of supply, it would not be likely to face an obligation to license FairPlay technology because of the effective competition from CD retailers: the competitive constraint might exist regardless of legal provisions.

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"The iTunes Music Store: does competition law hold the key to a closed shop?

This article (September 2004, 4 pages, PDF) considers the scope for challenging, under EC competition (antitrust) law and specifically Article 82 of EC Treaty, Apple's apparent decision not to license its DRM (digital rights management) technology FairPlay to competitors of the iTunes Music Store.

The article argues that:

The crucial issues for the application of (EC) competition law to requests for licensing of FairPlay are therefore: (i) whether, from the perspective of suppliers of downloadable music content, FairPlay is indispensable to enable iPod users to play back DRM-protected content; and, if so, (ii) how markets for the retail supply of music content are defined.

Based on Reckon's partners' previous work on market definition in the media sector, the article discusses some of the issues that would arise were a detailed market definition exercise to be needed. It then considers what this tells us about the scope for using competition law to address inter-operability issues in these markets.

We find it unlikely that Article 82 could be used to implement compulsory licensing in order to progress simply from a "less focused" form of competition (e.g. competition between the iTunes Music Store and suppliers of music content on CD format) to a "more focused" form of competition (e.g. direct competition between the iTunes Music Store and other retailers offering content downloads to iPod users). Using competition law to achieve inter-operability seems limited to cases where this is necessary to address the threat that a market will lack competition altogether — e.g. markets where the iTunes Music Store does not face effective competition from any other suppliers.

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Excessive pricing complaint

The UK Office of Fair Trading (OFT) has referred Apple's iTunes service to the European Commission following a complaint by the consumer association "Which?". The complaint concerned Apple's pricing policy through which online users in different European countries may face different prices for downloading the same music track to their computer. A Which? press release of 3 December 2004 reports that UK consumers pay 20 per cent more than French and German consumers. A previous Which? press release, of 15 September 2004, had argued that "Under European law UK consumers are supposed to enjoy the same benefits of the single market as other citizens of member states. However, the iTunes service ... prevents UK consumers from taking advantage of the cheaper download service offered to the French and Germans".

In passing the case on to the European Commission, the OFT decided that the "Commission is better placed to consider this matter, in particular as Apple iTunes operates in more than three EC Member States" and that "the European Commission is in a better position fully to address the issues raised by Which? in the context of wider single market issues relating to how the online exploitation of music is licensed across Europe".

On 9 January 2008, DG Competition announced that Apple would be reducing UK prices and that the Commission has closed its investigation.

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Links

Reckon September 2004 article

News and other articles

Decisions and judgments

Industry links

Related Reckon Open pages

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Last changed by Richard at 12:03 PM on Monday 15 August 2011.

Reference for this page:
Reckon Open "iTunes" 2011-08-15T12:03:46
Link within Reckon Open: [[iTunes]]