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JULY 27, 2004
By Peter Burrows For Apple, Harmony Is Off-Key [Page 2 of 2] MUSIC IS DIFFERENT. What about the consumers and the music industry in general? Conventional wisdom suggests that open standards are better than closed. Just as free markets work more efficiently than planned economies, the argument goes, thousands of competing companies can do a better job than Apple can do on its own with a proprietary approach. It's one reason executives from many big record labels publicly support Real's efforts with Harmony. But the market for legal digital music may be an exception. For years, the open approach failed to turn it into a viable business. Apple made that happen. For starters, Jobs figured out a simple 99-cents-per-song formula that the record labels could live with. Also, Apple used brand and advertising panache to make legal music downloading a hip alternative to illegal file-sharing to a degree far beyond what nerdier tech companies were capable of. Also, Apple's control over its hardware and software created the most elegant, glitch-free music-buying experience for consumers. Of course, that experience is far from perfect. Apple customers have complained about the iPod's low battery life and its high price. But Apple is improving the product. On July 19, it unveiled new models that feature 12 hours of battery life and a starting price of $299, $100 lower than before. COPYRIGHT CLAIM? Will a time come for Apple to give up the keys to its proprietary digital music kingdom? Almost definitely -- but not until a real contender emerges, or until falling iPod prices make it more profitable for Apple to sit back and collect royalty checks while cloners battle it out in the market. In the meantime, odds are good that a legal fight will break out between Apple and Real, say some analysts. Just a few months ago, Jobs rebuffed overtures by Real CEO Rob Glaser to license the Fairplay digital-rights-management software (DRM) inside the iPod. Since Real's Harmony software essentially circumvents the need for a device maker to license the DRM software, Apple might have a strong copyright claim, legal experts say. That might be especially true if Real begins to license Harmony to others. The way some experts see it, Apple could claim Real is denying Apple's right to license its own technology. "SERIOUSLY INTERESTED." But it's no legal slam dunk. Elements of the Digital Millennium Copyright Act give some leeway to companies that reverse-engineer a rival's technology for the purpose of compatibility. "Reverse engineering for the limited purpose of interoperability is generally considered to be permissible," says Ian Ballon, an intellectual-property lawyer with Los Angeles-based Manatt, Phelps & Phillips. Says GartnerG2's McGuire: "It's all a very big, fun, interesting gray area." Real's Wolpert denies that his company reverse-engineered anything or that the DMCA is relevant to the case. The stakes in this battle are big -- and not just for Apple. Chris Gorog, the CEO of Roxio (ROXI ), which runs the Napster music site, says he would consider licensing Harmony once its legality is established. "We're going to look at it very carefully," he says. "If Apple doesn't fight it, and the technology works, we'd be seriously interested. But Apple will most likely fight it." And Apple should fight it --- whether in the courts or by competitive means. In the long run, that would be a good thing for the industry and consumers.
 Burrows is Computer editor in BusinessWeek's Silicon Valley bureau Edited by Beth Belton
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