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January 4, 2008 9:42 AM
Posted by Benjamin J. Romano
InformationWeek broke the story of the antitrust lawsuit against Apple, filed New Year's Eve Day in federal court in San Jose, Calif.
In a 24-page complaint (PDF) plaintiff Stacie Somers -- a San Diego County woman who bought a 30-gigabyte iPod from Target in fall of 2005, backed by a group of big-shot antitrust attorneys -- states that Apple's iTunes online music and video store dominates the market with "approximately" 83 percent of the music market and "at least" 75 percent of the video market. It puts Apple's market share among digital music players at "more than" 90 percent for hard-drive based players and "approximately" 70 percent of the flash memory segment.
The plaintiff is seeking class-action status for the lawsuit.
Here's what the plaintiff alleges Apple is doing wrong with all that market dominance:
"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 to 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 computer operating system dominance, calling Apple's Music Store 'the Microsoft of music stores' in a meeting with financial analysts.
"Apple has repeatedly acted to foreclose even the possibility of competition by using its market power to force consumers to choose its products based not on their merits, but on the fact that technological restrictions and incompatibilities prevent them from buying its competitors' products."
The fact that only Apple's portable devices can play content purchased from iTunes, the complaint continues, allows Apple to price the iPod far above what it would in a competitive market. Likewise, Apple stifles competition by only supporting its proprietary digital music copy protection format instead of the more widely used Microsoft Windows Media Audio (WMA) format.
There's more than a hint of irony here, as Microsoft was dragged into court nearly 10 years ago for abusing the dominance of its Windows operating system to shut out competitors Java, Netscape (which recently got its death sentence) and Apple. Several provisions of the antitrust settlement Microsoft reached with state and federal governments were set to expire last November, but the legal tussle over extending them continues -- and should be resolved one way or the other by the end of this month. I've asked Microsoft for a comment on this Apple case, but I'm not expecting them to wade in.
Getting more detailed, the complaint alleges that Apple "deliberately designed the iPod's software so that it would only play a single protected digital format, Apple's FairPlay-modified AAC format," thereby "crippling" the default support for WMA in the iPod's processor, which is built by a third party.
"By preventing the iPod from playing WMA or any other protected music format besides [Apple's own], iPod owners' only option to purchase Online Music is to purchase from Apple's Music Store. This conduct constitutes an illegal tie in violation of antitrust laws."
The complaint also suggests that Apple could have licensed the WMA format -- from Microsoft -- for less than $800,000 a year.
To illustrate Apple's pricing power, the plaintiff examines a portion of the margins Apple makes on the various versions of its flash memory players. The NAND flash memory in a 1-gigabyte iPod Shuffle costs about $4.15, "at current spot prices." The memory in the 4-gigabyte iPod Nano is about $9.67. "Nonetheless, Apple charges an additional $100 for the 4GB model."
The plaintiff suggests Apple should be made to make the iPod compatible with content purchased from stores other than iTunes "and to allow competitors to sell their music and video content using Apple's iTunes platform." That would open the closed, controlled system -- or walled garden -- that Apple users have praised and Microsoft has sought to emulate with its Zune media players and online digital content store.
The plaintiff is seeking class action status to represent anyone in the United States, with some exceptions for governments and Apple employees, who purchased an iPod or content from iTunes after Dec. 31, 2003.
In a sort of preamble describing the markets Apple is dominating, the plaintiff made some interesting points -- not often articulated anymore because digital content has become so ubiquitous -- about why online music is superior to buying CDs at retail (similar points are made about online video vs. packaged DVDs):
"Online Music stores offer sale hundreds of thousands of songs at once, many times more than even the largest traditional music retailer. ... [It] allows [consumers] to purchase a la carte only the songs that they want, rather than having to buy an entire CD album in order to get only one or two desirable songs. ... [Also] it is more convenient, reliable and better for the environment. Consumers do not have to drive to a store to make their purchase, trucks do not have to transport the CDs from factory to warehouse to retailer, and there is no material or packaging produced only to be thrown away."