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

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

Summary: 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.

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TOPICS: Apple
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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.

Topic: Apple

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  • Thanks for NOTHING, David Berlind

    Thanks to people like you who rooting on the DOJ during the anti-trust case, we can't get free antivirus for Windows. The DOJ would be all over MS again if Onecare were made free.

    Arthas
    JamesNT
    • Huh?

      What motivation would MS have for making anti-virus free? They made IE free to stop Netscape from developing a business that would replace Windows. I see no such threat from AV companies. MS is going to charge you for everything they can, unless they have an agenda that will result in higher profits from making something free. That's not the case here.
      tic swayback
    • You never heard of ClamWin?

      http://www.clamwin.com/

      There are multiple free anti-virus products out there already.
      Edward Meyers
      • Or avast? (NT)

        (NT)
        ju1ce
      • Or AVG (nt)

        nt
        Hallowed are the Ori
      • Or Avira AntiVir?

        NT
        Bill4
    • Thanks for NOTHING, David Berlind

      >>...Thanks to people like you who rooting on the
      DOJ during the anti-trust case, we can't get free
      antivirus for Windows...<<

      Living under a rock? More than one free and/or
      open source AV for windows out there...and they
      work as well as if not better than commercial
      offerings. Or do I misunderstand your definition
      of free AV?
      joe6pack_z
  • Thoughtful article

    Thought this was a great article, well=reasoned and looking at all sides of the issue. Well done. Some thoughts of my own:

    Is this too nascent of a market to start heavily regulating? Should market forces be given a chance to take hold before governments step in?

    Is Apple really limiting consumers that much? Given that online sales comprise less than 5% of the music market, and that the vast, vast majority of songs on portable players come from other sources, isn't it just a tiny minority of consumers being inconvenienced, or locked in?

    Is it likely that at some point in the future, Apple will choose to license FairPlay (assuming download sales eventually surpass iPod sales)?

    ---Except for a few hold-outs, vinyl records are gone, as are 8-tracks and cassettes---

    Note that these decisions were made by the record companies, not the consumers. Vinyl is "dead" because the companies involved realized that it cost half as much to manufacture a cd as an album, and they could charge twice as much for it. Albums were deliberately phased out, despite continuing demand.

    Has Apple done anything illegal here? Can you compare locking your song sales to your player to the discriminatory OEM deals MS made? How is this different from Xbox games only playing on an Xbox, PS2 games only playing on a PS2?

    Is the government really sticking up for Apple, or are they, at the behest of the RIAA, trying to shore up DRM? If DRM is abolished, who loses out? Not Apple, they'll keep selling songs and iPods. Don't decisions like this affect all manufacturers? MS is starting their own store, linked to their own player. Samsung is doing the same. Do they have anything to lose here as well?
    tic swayback
    • You have a very good point

      However the analogy to Xbox and PS2 is not a very solid arguement. Xbox and PS2 games have to be played on each of their respective systems since they are programmed to work specifically for that hardware, however when it comes to music there is essentially no difference in a MP3 and an AAC file except the nature of their DRM.

      I tend to agree with the author of this story in that Apple is trying to gain a significant foothold on the portable entertainment industry by installing their DRM on any files that go into Itunes. My first portable music player was an Ipod and now that I have purchased a few cd's and videos etc. I feel that I am locked in since I can't switch over to a different player and play all the stuff I purchased from Itunes on a different player.

      Is this necessarily a bad thing? Yes and no. Apple licenses this material from the entertainment industry so they do need to have control over how many systems can play it. Now it's bad because they are locking people into playing on one system only. Should Apple be looked at for monopoly? YES.
      johnUSAF
      • RE: You have a very good point

        I think you, as well as Dave are missing the point. Apple is not
        locking you into playing your DL'd music only on an iPod. i can
        play any iTunes song on any player I want that will play MP3
        format music. Getting it there is even easier than converting my
        LP music to a format that I could take with me. In those days the
        DRM was physical and not software based.

        Not only that, Apple is not forcing me to play only their music
        on an iPod. I do not have to buy my music from iTunes. As a
        matter of fact most of the new music I add comes from my old
        LP's and from Magnatune. In no way does Apple lock me into
        anything.

        And as a final point, We would not be having this discussion
        except for the RIAA. there would be no iTunes or iPod to talk
        about if Apple had not been willing to include DRM in the
        process. The fact that Apple chose to do it in a way that would
        allow you to make legal copies of your music speaks quite highly
        of them. If the RIAA had their way you would have to buy
        another copy of the song for each player you wanted to use it
        on. So let's beat up on the right player in this game, the RIAA.
        They are the real villains here, not Apple.
        Protagonistic
      • Scrutinized, yes, but...

        To be a monopoly, you have to have a large share of the market
        -- maybe Apple is large enough here, but they're only number 5
        among all music retailers -- and they have to be using their
        market power to eliminate competition. That's what Microsoft
        did to eliminate Netscape and other software. They forbade
        resellers from putting Netscape on the desktop.

        Presently, you can fill your iPod up with CDs, with pirated music,
        with cracked DVDs, with reformatted, home-rolled videos, and
        even with converted WMAs. No market power used to insist that
        only iTunes be used. In fact, the majority of the average iPod
        isn't filled with iTunes music.

        Does PlaysForSure have a lot of music stores? Yes. Can people
        buy music for those players? Yes, all over the place.

        Of course, Zune will use another technology, that won't
        interoperate with even its own PlaysForSure DRM. Ha, ha, take
        that, suckers.

        I'd love for DRM to disappear completely, and prices come down
        to the point that it isn't worth fishing around for stuff on the
        web. Then, of course, it'd be great to use any music store you'd
        want.

        I think Apple's iPod would still do pretty well.
        Swift48
      • Which brings up the next question

        ---Xbox and PS2 games have to be played on each of their respective systems since they are programmed to work specifically for that hardware, however when it comes to music there is essentially no difference in a MP3 and an AAC file except the nature of their DRM.---

        Actually, AAC is an open format, it's AAC + FairPlay that only works on an iPod/iTunes.

        But that raises the question, would Apple be in the free and clear if they developed their own file format? Wouldn't they be in the exact same position as the Xbox/PS3 if they had some weird format that only worked on their hardware?

        And then, what is the difference between that weird format and AAC plus FairPlay? Why is one considered okay, but not the other? Couldn't you argue that Xbox and PS3 should have to license their technology to other device makers as well?
        tic swayback
        • Games and music are not the same.

          Music is widely available on cd which can be played on anything that is capable of playing cds. Apple are taking something that users have traditionaly had the ability to play anywhere they want (i.e home stereos, mp3 player, portable cd player and now console hdds) and removing that ability.
          With games the developers are creating something that, by it's very nature, will only work with the hardware that they have spent money and time creating the game for. If they want it to be released on multiple platforms they must spent more money to develop a seperate game for each.
          If they licenced their technology to others, the other's tech would have to be exactly the same. Emulation is not the way to go in that area because the hardware has to emulate the os of the original as well as the game. The limitations of this can be seen when trying to play old NES games on the PSP - despite being much much more powerful the games don't run that well.

          If Apple developed their own proprietary format there will still be a disparity between what people have expected to be able to do since the inventions of home recordable music and the walkman, and what Apple have decided to allow.
          DRM should only be about piracy prevention, not an instrument to increase the sales of hardware.
          MrCrun
          • Aren't they

            Games have existed since humans developed the brain power to play them. Computer game makers are taking something that users have traditionaly had the ability to play anywhere they want and removing that ability.

            ---With games the developers are creating something that, by it's very nature, will only work with the hardware that they have spent money and time creating the game for---

            And Apple is creating something (a DRM protected version of a song) that, by its very nature, will only work with the hardware that they have spent money and time creating the DRM for.

            ---If they want it to be released on multiple platforms they must spent more money to develop a seperate game for each.---

            If Apple wants the iTunes songs to be released on multiple platforms they must spend more money to develop a separate DRM system for each.

            Just playing devil's advocate.

            ---DRM should only be about piracy prevention, not an instrument to increase the sales of hardware.---

            Sad, because it fails miserably for the first. What DRM is really for, is to get you to pay for things you're use to doing for free. Want to hear a song in more than one place? Pay again. Want to fast forward through a song? Get ready to pay for that soon.
            tic swayback
      • But we're forgeting one point...

        and that is no one is forcing the consumer's hand to purchase an iPod. Everyone knows full well that when you purchase an iPod the service you will most likely be using is iTunes. If one realy doesn't like the iTunes arangement, then other MP3 players should be looked at.
        There are other ways to get MP3 into your iPod besides using iTunes. Sure it takes a little longer and for some solutinos, the play-list are not compatable with the iTunes play-lists. But thoses are the trade-offs.

        Quite frankly, I don't see the issue. If you don't approve of getting locked ito the whole iTunes thing, then purchase a different player from the start.
        Dom Doe
  • Monopoly definition

    You did a pretty decent perigee there to the formal definition of monopoly power (note: not "being a monopoly," but "having monopoly power.")

    Price control is one of the flashing red lights.

    If a market participant is in a position to dictate pricing to either suppliers or customers, then by definition they have monopoly power. The regulatory "market definition" is really more a matter of spelling out the market segmentation that exists in the real world -- if it didn't, once again, there'd be no way to dictate.

    Much as with the Microsoft case, it's Just Plain Wrong to say that the monopolist "couldn't have known" until the regulator accused them. A market participant who dictates to its suppliers or customers in the absence of monopoly power is cutting its own throat -- so both Apple and Microsoft can be safely presumed to have known that they had the power, and thus the legal obligation to avoid its abuse.

    IANAL and all that. Have a good weekend.
    Yagotta B. Kidding
    • price control

      The basic premise here is that the "monopolist" can raise prices to whatever they want since by definition there are no viable alternatives.

      However, most rational people would not pay $1,000 per song on iTunes nor for Windows. Instead the economic incentive would be created to find viable alternatives. Only the governement can create and enforce a real monopoly since the market will adjust according to the economic incentive.

      Apple doesn't have a "monopoly". Even the blog admits that Microsoft has equivelant technology. The market thus far continues to choose iTunes though that could change just as it could with Windows.
      Spacely Spacerockets
      • You forgett about collusion

        Does it make you feel better if it is an Oligopoly?

        The market is not free... in this case will your non-Apple approved player play a song from the iTunes store without engaging in rip-burn, an activity which the RIAA recently testified to congress that they believe infringes their copyright and in which according to certain "education" materials released to schools violates copyright law (not to mention lowers the quality of the music)?

        And yes, it sure is possible to fix prices... why do think anti-trust laws were written in the first place.
        Edward Meyers
        • separate issue

          Collusion between competitors to fix prices is obviously bad. However, even in this case a financial incentive is created for new entries into the market which likely will break the oligopoly.

          I don't deny the need for some government protection of the market. It just seems silly to call a proprietary system a "monopoly" just because other competitors in the market have not done as well.

          The competitors should do a better job to attract the market away from Apples system and onto their own. Just because they have failed to capture the markets attention does not justify labeling them a "monopoly" and all the baggage that goes with that designation.
          Spacely Spacerockets
          • Do you even know what they are accused of?

            The number 1 complaint is their EULA/TOS, and this really shows how very little of what you or the DOJ knows... let alone why either feel motivated enough to come to Apple's defense , as the biggest complaint is that it binds users in Norway to English common law rather than Norwigian Law.

            this is a summary of what they are accused of as breaches of the Marketing Control Act:

            [i]
            1. The EULA states that the legal relationship between the company and customers is regulated by English contract law. It is unreasonable to expect Norwegian consumers to have comprehensive knowledge of English law. Products marketed to Norwegian consumers in Norway are subject to Norwegian law - a right that cannot be waived by a clause in a company's standard customer contract.

            2. The EULA is both vague and hard to understand for the customers.

            3. The EULA removes iTunes' responsibility regarding damage to the consumers computer due to software errors even though responsibility cannot be waived in Scandinavian Law.

            4. The EULA is unbalanced to disfavor the customer. Scandinavian law requires any written agreement to favor both parties.

            5. iTunes limits its customers? right to freely use legally purchased products by means of Digital Rights Management.

            6. iTunes? contract entitles the company to at any time change the terms of the contract without notice, including the selection of players or software that must be used for iTunes-files, and also the number of times a customer can change or copy already purchased files.

            7. The EULA is both vague and hard to understand for the customers.

            [/i]

            http://forbrukerportalen.no/Artikler/2006/1138119849.71

            The fact that the US Government not only condones contracts that destroy national sovereignty but also believes any of those contract terms are fair is disheartening. Most disturbing is that the DOJ is telling countries they shouldn't investigate terms of service that bind users who purchase their content (The transaction takes place in their country) on a service targeted towards citizens of one country to laws in another country.

            The competitors are accused of doing the same thing. Again collusion.

            And yes, the US DOJ/FTC needs to look at the iTunes contract in the US as it does all the same except the binds US citzen's to laws of another country.
            Edward Meyers