Apple Faces Class Action for iTunes-iPod Tying
Mimicking the arguments of European regulators, a class-action suit against Apple said the company violates antitrust law by tying purchases through the iTunes Music Store to iPods by virtue of Apple’s proprietary DRM. The complaint in Somers v. Apple, filed in U.S. District Court, San Jose, pointed to the exit of “innovative” hardware makers from the digital music space and Apple’s unusually high margins relative to the industry, as evidence of improper monopoly.
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Apple has an 83 percent share of the market for downloaded music, 75 percent for video, 90 percent for hard drive-based portable music players and 70 percent for flash-based players, the complaint said. It emphasized the advantages of download stores and digital music players over traditional retailers and CD players, such as their convenience, larger selection of content and environmental friendliness, in a bid to show that Apple monopolizes the most relevant markets for music and video.
Dell, Olympus and Rio have pulled out of the digital music space because Apple “excluded them from reaching the majority of their potential customers, no matter how much cheaper or how much better their products were,” the complaint said. “Given that other companies’ products cannot even begin to compete for the business of most consumers, Apple can and does sell the iPod at prices far above those that would prevail in a competitive market.” The complaint pointed to the $100 price difference between the iPod Nano 1 GB and 4 GB versions, which is “excessive and arbitrary,” since the parts cost about $5 more for the latter.
Apple is the only digital music company whose portable player doesn’t support the industry-standard WMA format by Microsoft, the brief said. It would be easy to add WMA playback because Apple’s third-party manufacturers use certain chips in iPods that natively support WMA, but Apple is “crippling” that functionality, the complaint said. It would cost Apple about $800,000 a year to license WMA from Microsoft, or 3 cents per sold iPod.
Apple’s behavior represents a deceptive trade practice under California law, the complaint said, following its federal allegations. Purchasers may have “reasonably believed” they could play purchased content from any store on the iPod, or that iTunes-purchased content could be played on any portable player, the complaint said, because DVDs, CDs, audio and VHS cassettes are compatible with any such player. The complaint said Apple’s use of proprietary DRM violates a California law barring any “unconscionable provision” in a contract. California law is generally stricter on consumer protection than federal law, and was the basis of another ruling against Apple, though the subject matter was freedom of speech in a trade-secrets case and the venue was a state appeals court (CED May 30/06 p8).
The complaint also pointed to European antitrust authorities’ investigation of Apple’s pricing practices, legislation to force Apple to open its platform, and consumer lawsuits against the company.