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Regulators, consumer groups go after Apple

The worldwide success of Apple Computer's digital media platform  is starting to catch the critical eye of consumer advocates and regulators in several European countries.
/ Source: BusinessWeek Online

The worldwide success of Apple Computer's digital media platform — the iPod portable music and video player, and the iTunes Music Store — is starting to catch the critical eye of consumer advocates and regulators in several European countries.

Norway's Consumer Ombudsman, acting on a complaint by the country's Consumer Council, has found that Apple's practice of selling downloadable songs that can be played on only one portable player — the iPod family of products and not other brands of player — violates Norwegian law.

Additionally, the Ombudsman has ruled that certain provisions within Apple's End User License Agreement run afoul of the country's regulations. Those conditions include language that allows Apple to change the terms of the purchase after the purchase is complete, and that the company claims no responsibility from damage that iTunes software may cause a customer's computer. Apple has until June 21 to make changes, or it may face fines. Similar actions are expected from regulators in Sweden and Denmark.

French initiative
The latest moves come in the wake of French efforts to loosen the tight ties between the iPod player and the iTunes music store. Earlier this year, French legislators wrote a bill that would force Apple and other companies that sell music over the Internet to make the songs they sell compatible with all portal digital music players. Apple branded the French legislation as "state sponsored piracy" and threatened to shut down the French outpost of its iTunes music download service (see BW Online, 03/15/06, "Apple's French Dis-Connection" and BW Online, 03/21/06, "Apple Vs. France"). It's not clear whether the French legislation will in fact become law.

In contrast with the action in the French matter, Apple had a much more measured response to the situation in the Nordic countries. In a statement released by a company spokesman, the company said: "We have received a letter from the Norwegian Consumer Council and are looking into it. We are looking forward to resolving this matter." A source familiar with the company's thinking on the matter said there has been no talk internally about shutting down the iTunes music stores in Norway, Denmark, or Sweden, as there was in France.

Apple doesn't break out the results for its music or computer sales by country, but in its most recent quarter, Apple reported sales of $966 million in Europe, representing more than 22% of its $4.4 billion in total revenue for the period. That makes Europe the company's second most important geographical region behind the Americas. Apple's sales in Europe in the quarter grew by 37% over the year-ago period.

Stateside protests
As the outcry in Europe is spreading, there is some opposition to Apple's business practices in the U.S. A group called the Free Software Foundation carried out protests on June 10 at seven Apple retail stores in cities that included New York, Los Angeles, Chicago, and Seattle (see BW Online, 06/09/06, "The Growing Racket Over iTunes"). The "Defective by Design" protests are aimed at Apple, as well as other companies the foundation thinks are supporting a growing trend toward legal restrictions that bind digital content to particular playing devices. "This isn't intended to attack Apple and its innovations, but really to draw attention to the existence of DRM (digital rights management) technologies, and how they restrict what consumers can do with their music," says Ted Teah, who maintains a directory of free software for the Free Software Foundation in Cambridge, Mass.

Analysts speculated while the market for iTunes downloads in the Nordic countries isn't huge, Apple is certainly starting to feel some heat to adjust its business model. "Norway is not a major market for Apple, but if it [the anti-Apple legal proceedings] spreads to Britain, this could cause them serious problems," says Paul Jackson, an analyst with Forrester Research based in Amsterdam. Jackson says that even regardless of these legal proceedings, Apple's current approach isn't a smart business plan. "It's not encouraging people to make the step into digital music," he says. Additionally, Jackson says, Apple will have to weigh the benefits of alienating potential new customers versus holding onto its DRM system.

Drawing the line
But where to draw the logical line? That's the question that Michael Gartenberg, analyst with Jupiter Research in New York, raises. "At what point are you going legislate compatibility? I can go out and buy video games that work on my Xbox 360. But should there be a law that says the same game should work on my Playstation 2? And how about computer software? Should there be a law that says the software I buy that runs on Microsoft's Windows should also run on Apple's Macintosh? At a certain point, this line becomes extremely blurry," Gartenberg notes.

Moreover, Apple's DRM restrictions aren't all that restrictive in the first place, he says. Any songs downloaded from iTunes can be burned to a CD, from where they can then be re-imported to computer as a fully compatible MP3 file playable on any computer or digital music player. "These arguments are a little specious," he says. "It's not as if there is no consumer choice in getting this content. There are other players and other services from which you can buy the same content."

Elsewhere in Europe, Apple is facing hassles over the same compatibility questions, as well as its pricing structure in Britain. Songs sold via iTunes in that country go for 79 pence, or about $1.45 vs. .99 euro (about $1.25) elsewhere in the European Union. "We know that prices in Germany and France are lower," says Alena Kozakova, principal economist at Which?, a British consumers' advocacy group. "There is no justification of this because the product is virtual. The traditional way of justifying this is that property and wages are more expensive in Britain and therefore products should be as well. But because this product is virtual this cannot apply."

The entire blowup is taking place against the backdrop of a larger fight over European copyright regulations. Many EU countries have vastly differing copyright regulations that are far from harmonized in a cohesive way. Mike McGuire, analyst with research firm Gartner in San Jose, Calif., says the consumer-inspired attacks on Apple are only one front in the larger DRM war. "It's not simply Apple," he says, "It's anybody who sells DRM, and the only reason DRM is on these devices is because of the copyright holders. The only thing that makes Apple a target is its position of leadership in the field."