Does Apple have a music monopoly issue?

While Macworld is running strong January 9 to January 12, lawyers will be filing documents for an antitrust complaint in the U.S.
Written by Larry Dignan, Contributor

While Macworld is running strong January 9 to January 12, lawyers will be filing documents for an antitrust complaint in the U.S. Northern California's District Court that could wind up being a lot more important than any product launch.

In Apple's annual report filed last week, the company noted a few lawsuits--including one over an alleged Nike-iPod patent infringement and another about G4 malfunctions--but the most interesting one is an antitrust complaint challenging Apple's tactics in the online music market. In a nutshell, a class action lawsuit (Tucker vs. Apple Computer) initially filed July 21 alleges that:

"Apple has engaged in tying and monopolizing behavior, placing unneeded and unjustifiable technological restrictions on its most popular products in an effort to restrict consumer choice and restrain what little remains of its competition in the digital music markets. Apple's CEO Steve Jobs has himself compared Apple's digital music dominance to Microsoft's personal computer operating system dominance."

Apple sought to dismiss the complaint but U.S. District Judge James Ware shot Apple down on Dec. 20 (PDF download) In a Nov. 6 filing (PDF download), Apple argued that "imposing a duty of interoperability would inhibit the very innovation and technological advances that the antitrust laws are designed to promote."

Next step is a case management conference Jan. 22 and parties need to file statements no later than 10 days before that meeting. Ware found Apple "presented no reason for the Court to dismiss" the suit. Ware noted:

"Apple has presented various business rationales for its product decisions; however, the existence of valid business reasons in antitrust cases is generally a question of fact not appropriate for resolution at the motion to dismiss stage."

Bottom line: The complaint, which seeks an unspecified amount in damages, will proceed from here. Reading through the complaint it's striking how Apple has grown into becoming an antitrust target. With the iPod and iTunes integration Apple followed its historical playbook--it integrated its hardware and software into a user experience. What's different this time? Apple dominates digital music. No one cares what Apple does with its OS and hardware when its market share doesn't approach high single digits.

I'm no lawyer, but it's hard to envision a serious antitrust suit against Apple. However, stranger things have happened. Meanwhile, anyone with an iPod and thoughts of trying a new player notices some truth in the complaint--that's why Bill Gates "buy a CD" comments make a lot of sense. Here are a few excerpts in the initial complaint (PDF download):

"Apple has repeatedly acted to foreclose even the possibility of competition by using its market power to force consumers to choose its products not based on their merits but instead because technological restrictions and incompatibilities."

"Apple also makes the iPod unable to play music sold at its rivals'  Online Music stores."As for specifics, the complaint alleges that Apple alters the guts of the iPod--Portal Player's system-on-a-chip--so it will not support the WMA format. Portal Player's system-on-a-chip by default supports WMA. "Deliberately disabling a desirable feature of a computer product is known as 'crippling' a product." The complaint argues that Apple insistence on the AAC format while disabling WMA amounts to "crippleware" and is an "illegal tie in violation of antitrust laws."

"Apple deliberately makes digital music purchased at the Music Store interoperable with its competitors' Digital Music Players." As for specifics, the complaint argues that Apple forces anyone using iTunes to buy an iPod. "After purchasing their digital music library from Apple, these consumers are locked into making all future digital music player purchases from Apple."In other words, if you switch players you lose your digital library."

--"Apple has begun using these same illegal tactics to block consumers from purchasing and playing Online Video from its rivals' online stores and video-enabled Digital Music Players."

Overall, the plaintiffs are looking for an injunction that would force Apple to make the iPod compatible with other online music and video purchased elsewhere. As for hurting consumers, the plaintiffs note that Apple has been able to maintain its profit margins in a highly competitive market with pricing that is "exactly that of a monopolist, excessive and arbitrary." 

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