Europe vs. Apple: Facing the Music

At some point, the company will need to address concerns about its iPod-iTunes DRM link. Will Apple eventually inch toward interoperability?

by Dan Carlin

When Norway's consumer protection agency filed a complaint last June against Apple (AAPL), the Cupertino (Calif.)-based digital music and computing giant barely blinked. After all, with sales booming around the world, how much damage could a small band of critics in a nation of 4 million people wreak?

Plenty, it turns out. The Norwegian Consumer Ombudsman continued to develop its case, which alleges that the exclusive link between Apple's iPod and iTunes music store violates Norwegian consumer law by preventing iPod owners from playing songs bought from other online services or listening to iTunes songs on rival MP3 players. "We want to make it very clear in Norway that their business isn't fair to consumers," says Torgeir Waterhouse, a senior advisor to the Norwegian Consumer Council, who is leading the Apple investigation.

Consumer Backlash

Now the mouse that roared is picking up supporters. On Jan. 25, the Dutch Consumer Ombudsman weighed in with its own concerns over what spokesman Ewald van Kouwen called "illegal practices" by Apple. That brings to seven the number of European countries that are looking into the iPod-iTunes connection, including France, Germany, Sweden, Denmark, and Finland (see BusinessWeek.com, 1/25/07, "Consumer Groups Wage War on Apple DRM").

The implications of a snowballing consumer backlash can't be lost on the digital music star, which sold nearly $9.6 billion worth of iPods and digital music in the fiscal year ended last September and got 40% of revenues outside the U.S. Indeed, the growing chorus of discontent—and the likelihood of a legal showdown in Norway—could have a ripple effect across Europe and throughout the digital music business.

Experts say Apple and its competitors, especially Sony (SNE) and Microsoft (MSFT), who could likewise be targeted for similarly closed business models, must take this David vs. Goliath battle seriously. "Apple is concerned about precedent," says Mark Mulligan, senior analyst with JupiterResearch in London. "There's a good chance whatever happens in Norway will be followed elsewhere in Europe."

EU Opposition

Indeed, the risk facing Apple is that the European Commission, which made waves with its antitrust case against Microsoft and could strike again against Intel (INTC), might step into the battle. "If Apple becomes the major hub between the consumer and the music industry, one could argue there's a need for Europe-level intervention," says Stefan Bechtold, senior research fellow at the Max Planck Institute for Research on Collective Goods in Bonn, Germany.

Such a move, were it to happen, could take five or more years, cautions Andrew Sheehy, the founder and vice-president at digital music consultancy Generator Research, in Newton Abbot, England. "Getting an EU-wide interoperability directive would be very difficult and time-consuming," he says. "Apple will try to string it out as long as possible." And if the matter made it to European court, Sheehy argues, "Apple would take them to the cleaners" because the legal underpinnings are weak.

Long before then, however, Apple must deal with Norway. By September of this year, the company will be required to show authorities there that it has begun modifying its digital rights management (DRM) system to comply with Norwegian law. If it does not, the Norwegian Supreme Court could order a shutdown of the Norwegian iTunes site. Or Apple, which declines to comment, could pull out of the market. "It's up to them to do the right thing," says Norway's Waterhouse.