The European Union has just launched an inquiry into whether Apple’s famous online music store, iTunes, falls foul of competition laws by way of its territorial sales restrictions. UK consumer group Which? complained that British residents were paying more to download songs than any other EU nationals back in 2005 and is said to be pleased with news of the inquiry. Downloading a track from iTunes costs 79p in the UK, compared to 72p in Denmark and only 66p in France, Belgium and Germany.
The confidential statement of objections sent to Apple is the first stage in formal proceedings. Apple is not accused of occupying a dominant market position but of operating restrictive business practices. According to the Commission, iTunes uses customers’ credit card details to determine their country of residence and then restricts them to buying tracks from that country’s iTunes website. So, someone with a credit card issued by a branch of a bank in the UK can only buy songs from the UK iTunes store. The Commission allege that this restricts customers’ choice of where to purchase songs and, it follows, which songs they can purchase and at what price – thus violating EU law on the prohibition of restrictive arrangements.
Apple claims that it has not done anything wrong and that it had, in fact, originally wanted to establish an iTunes music store to service the whole of the EU but was prevented from doing so by music labels and publishers. The EU has also sent statements of objections to leading record companies believed to be involved in the practice. The letters are the first stage in formal proceedings and the record companies, and Apple, now have two months to respond.
The move casts a shadow on the recently announced and ‘celebrated’ agreement with EMI to make EMI’s music catalogue, which includes The Rolling Stones, Coldplay and Corrine Bailey Rae (but not yet Beatles) tracks, available through iTunes without the use of Digital Rights Management software (DRM). DRM is essentially a software locking tool and is a powerful anti-piracy device. EMI’s decision to remove such devices has raised concern over potential widespread piracy, although EMI argues that the most effective way to beat piracy is to make music available legally, conveniently and at a fair price. The move is expected to encourage other music providers to follow suit with more than half of the songs available on iTunes expected to be available without software locks by as early as the end of 2007.
The use of DRM software itself is controversial and opponents of its use will no doubt welcome EMI’s move. Norway, which is not part of the EU, has given Apple until September to comply with Norwegian law and offer a fair deal to Norwegians who purchase music from iTunes. Norway contends that the use of DRM software restricts consumers' use of legally purchased music – in particular, it doesn’t allow users to download music on to non-iPod music players. Interestingly, Apple’s use of DRM, however, is not (yet) included in the remit of the EU’s inquiry.
If found guilty of operating a restrictive business practice, Apple could be faced with a hefty fine of up to 10% of its worldwide annual turnover. The outcome will clearly have a profound effect on e-commerce in the UK since it will scrutinise cross border sales.
This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.
