US trustbusters to Europe: Apple DRM monopoly? What monopoly?

In a story that still has my head spinning (and me wondering whether I need to go on medication or something), US antitrust officials are apparently lobbying foreign officials on Apple's behalf. Reuter's Peter Kaplan reports:

A top U.S. antitrust official on Wednesday urged foreign governments to think twice before interfering with popular new technologies, singling out overseas scrutiny of Apple Computer Inc.'s iTunes online music service as an example of misguided enforcement..... Justice Department antitrust chief Thomas Barnett cited proposals by some officials overseas to impose restrictions on iTunes as an example of overzealous regulation that he said could discourage innovation and hurt consumers...... Barnett warned about a rise in "regulatory second-guessing" that "threatens to harm the very consumers it claims to help.".....The comments came during a speech at an antitrust law conference in Washington, D.C., before an audience that included antitrust officials from Europe and Asia.

I'm not sure whether to lash out at Barnett or feel sorry for Microsoft.  Why? As it turns out, there's a little bit of subjectivity in trustbusting.  For the Feds to bust up a monopoly, they must first prove it exists and proving it exists starts with (1) defining a market and (2) demonstrating how one company dominates that market. When US Department of Justice first started going after Microsoft for being a monopolist, it defined the market Microsoft was dominating as "Intel-based desktop operating systems."  Back then, Apple wasn't making Intel-based systems which raises a good question: What if it was? Would Microsoft's share of that market have still been big enough to be declared a monopoly? Or, would have the trustbusters had to redefine the market to something narrower that Microsoft dominated (what that would be, I don't know).

When I first saw the DOJ come up with that definition, that I realized how a clever lawyer can make any company seem like a monopolist. All you have to do is define a market in such a way that the company you're chasing after conveniently dominates it. 

Looking back on Microsoft's history of entanglement with US trustbusters, I still think it was right of the government to interfere.  And, even though I always thought some restructuring (break-up) of the company (though not the one proposed by Judge Penfield-Jackson that was eventually overturned) made sense, I can't help but wonder if the remedies in place are actually working. For example, to the extent that trustbusting is about preventing a monopolist from creating new monopolies, one of the big worries had to do with how Microsoft's control over what appeared on the displays of the majority of computers when they were first unboxed could give its online services (eg: MSN) an advantage over competitors. Eventually, Windows XP's default desktop was cleared of all icons (promotional or not) and Google and Yahoo! are handily beating Microsoft in the online space.  Is there a connection between the current state of online affairs and the antitrust remedies? Maybe. Maybe not.

But, back to the point of defining markets, I've been one of those people out on a limb saying that Apple has a monopoly that US trustbusters need to pay attention to. But, to be honest, my logic has largely been based on a convenient definition of a market that, once defined, makes Apple look like a monopolist. Apple would not look like a monopolist if the market was just the retail music market.  Or, even if it was just the online music download market (which includes legal unpaid downloads from sites like MySpace).  The US market that Apple, with its 88 percent share (Steve Jobs cited this figure during his product roll-out earlier this week) monopolizes is that of online single-song download sales. Granted, that's a very narrow, perhaps conveniently-defined market.  But so too was Intel-based desktop operating systems.  

Ultimately, trustbusting is more an art form than it is a series of tests. It takes a keen eye to (1) spot certain control points within a market and (2) conclude that consumers are (or will be) subject to harm as a result. Then, trustbusters must make their case -- a process which includes definition of the market being dominated and the harm to consumers that has or will come as a result -- for ordering a court-backed remedy. If Apple had nothing but 88 percent of online single-song download sales, we might not be having this discussion. But Apple has leveraged that marketshare into control of something else: consumer choice in terms of how that music is played back.

Through the attachment of its proprietary copy protection technology (FairPlay) to almost every individual piece of content (music, video, etc.) that flows out of the iTunes Music Store (iTMS), Apple decides what devices and software the aforementioned 88 percent share of the market is compatible with. So far, barring a few iTunes phones from Motorola (phones that Apple's rumored iPhone will easily eliminate from the market), Apple has decided that consumers only get to use its software (iTunes) and its portable devices (iPods) despite the fact that hundreds (if not thousands) of device manufacturers would be willing to pay a reasonable licensing fee to be FairPlay-compatible. This stands in stark contrast to the way consumers have traditionally acquired rich content. For example, buying a music CD and being able to use it on any of our home stereos, in any of our cars, or any of our portable playback devices -- all of which involve a wide range of consumer electronics manufacturers. The same was true of 8-tracks and cassettes and is currently true of DVDs. 

France, Norway, Denmark and Sweden are absolutely right to be concerned about the impact that Apple's growing marketshare will have on its citizens and so too should be the US' own antitrust chief Thomas Barnett.  Not only is Apple limiting consumer choice, it is foreclosing on competition. By refusing to broadly license FairPlay to the traditional consumer electronics manufacturers that would jump at the chance to do so, Apple is setting itself up to replace them (or, should I say, nose them out).  We've seen the record industry go through several media shifts that are quite absolute in nature.  Except for a few hold-outs, vinyl records are gone, as are 8-tracks and cassettes. Today, CDs still rule but they will eventually give way to file transfers (over the Internet and at retail locations). 

Not only does Apple know this, it is banking on it. If the majority of music and videos sold in the future doesn't work on playback devices from Sony, JVC, Samsung, Pioneer, Philips, Integra, Escient, and Sonos (just to name a few off the top of my head), then what becomes of those companies and their offerings? Sure, we can go through gyrations and shims to strap Apple's gear to our existing systems. But over the long run, Apple, as evidenced by the iTV it showed off this week, will offer simpler, Apple-only solutions that will make more sense than adaptations.

But the harm caused by Apple's monopoly doesn't stop there. Proving that even such narrowly defined market as online single-song download sales is a powerful force to be reckoned with, the record industry recently pleaded with Steve Jobs to let them control the price of their products (the downloads). As with any producer of anything, record labels should be able to set the price (or at least the wholesale price) of their products and let the cards fall where they may.  If I was a record label executive, I'd like to be able to charge $2 for a song at the top of the charts, and 10 cents for a 30 year old song that a lot of people would never pay $2 or even 99 cents for. Heck. People are paying $3 for ringtones now and, in many cases, those ringtones are shorter, lower quality version of the songs available via iTMS for 99 cents. The market is clearly willing to pay more than 99 cents.  Giving the entertainment industry the freedom to price their products is also good for consumers because record labels might start to compete on price. 

Despite what Barnett says, it doesn't have to be this way. In addition to criticizing his European antitrust contemporaries for "overzealous regulation that he said could discourage innovation and hurt consumers," the Reuters report said:

Barnett said Apple should be applauded for creating a legal, profitable and easy-to-use system for downloading music and other entertainment via the Internet.

There's no doubt that Apple should be applauded for taking the friction out of an incredibly complex process and turning it into child's play. Apple did it first and to date, Apple still does this better than anybody. But, Barnett is gravely mistaken if he thinks that by making FairPlay a standard that's available on reasonable and non-discriminatory terms to any company interested in licensing it (a move that would probably satisfy the Europeans), that Apple would stripped of its ability to innovate or provide the easiest to use product. 

Compared to other digital rights management (DRM) technologies (for example, Microsoft's), there's nothing special about Apple's FairPlay that makes iTMS downloads more legal, more profitable, or easier to use.  In fact, judging by the way the newest versions of Apple's and Microsoft's DRM technologies were both cracked within 24 hours of their release, both appear equally vulnerable to compromise. Legality and profitability are about business rules and policies.  Ease of use happens at the user interface level which is so sufficiently divorced from the DRM layer that a talented software engineer could replace Apple's DRM with Microsoft's and, from an ease of use point of view, the end-user wouldn't know the difference.

And that's the reason Apple should be opening up FairPlay to use by others and Barnett should not be out there defending a monopoly with an argument that's dubious at best. In fact, the opposite of Barnett's argument is what's true. History has routinely proven that when a market is free to comply with a standard and compete on its implementation, innovation flourishes and consumers reap the benefits. With more pressure from the competition, a newer easier-to-use interface from Apple is more likely.  And so what if, as a result of giving others access to the FairPlay specification, it isn't Apple that ends up producing the easiest to use interface. What if its Sonos, Creative, iRiver, or even Microsoft that does? Who benefits?  You.