Apple Facing Trial Over Whether Its Use Of DRM Violated Antitrust Laws

from the this-could-matter... dept

When Apple first launched the iTunes store for music, it had DRM deeply embedded in it. According to reports around the time, this DRM was a key part of allowing Apple to get into the business of selling music. The labels demanded strong DRM. It didn’t take long for most people to recognize how the labels’ own demands for DRM actually gave Apple tremendous leverage over the record labels by basically handing the market over to Apple while making it that much more difficult for a competitor to jump into the space. While, years later, Apple and the labels finally ditched the DRM on music, one of Apple’s competitors, Real Networks had tried to hack its way around Apple’s DRM, which was called FairPlay, with its own DRM, called Harmony, that more or less reverse engineered Apple’s DRM. Apple responded by changing things so that Real’s music wouldn’t work on iPods (yes, this was back in the day of iPods). Real adjusted… and Apple broke it again.

While all that went on a decade ago, a lawsuit over whether or not Apple’s use of FairPlay to keep out Real’s music violated antitrust laws appears to finally be heading to trial:

In this lawsuit, plaintiffs are claiming the anti-Harmony measures in iTunes 7.0 broke antitrust laws, because it had the effect of illegally raising the price of iPods. Users were continually forced to either stop playing any songs they had bought from the Real store, or convert them to a non-DRM format, for example by burning the music to CD and then ripping the CD to their computer.

That produced “lock-in” to the iTunes environment and increased consumers’ “switching costs,” the plaintiffs argue.

Apple sought to have the lawsuit tossed out, but the judge is letting it go forward. While the specifics of this case now seem like ancient history, the eventual results, should it get very far, could be interesting for other makers and users of DRM (Amazon might want to pay particular attention). From the judge:

That theory is intricate, but ultimately it amounts to a charge that Apple’s release of 7.0 unlawfully maintained Apple’s monopoly in the market for portable digital media players by making demand for iPods less elastic. Specifically, plaintiffs claim that 7.0 resulted in an increased “lock-in” effect for iPod owners who purchased songs online. Lock-in, according to plaintiffs’ principal economics expert, “is a form of foreclosure that arises from actions that increase the cost to consumers of switching to a product that has better quality and/or a lower price.”….

Plaintiffs offer expert opinion that Apple, by counteracting Harmony, “raised the cost of switching from iPods to competing portable digital media players by eliminating the ability of consumers to collect a library of downloads that could be played on all players.” (Id.) That is, 7.0 made iPod owners unable to play songs purchased from iTS competitor Real and thus pushed them to make their online song purchases only on the iTS. As a result, it discouraged iPod owners from buying a competing, non-iPod digital portable music player when it came time to replace their iPods due to loss, breakage, or a desire to upgrade. (Id.) Such owners would have to either forego use of the songs they had purchased through Real (as well as any other online music store besides iTunes, though that is not part of the damages alleged in this case), repurchase such songs through other, iPod-compatible means (for instance, iTS or physical CDs), or convert music bought from Real into a non-DRM format, for example, by “burning” that music to a CD and then “ripping” the CD onto their computers in a file format with no DRM, from whence the songs could then be loaded on their iPods. These increased “switching costs,” plaintiffs argue, locked iPod owners into continuing to purchase iPods, notwithstanding the allegedly similar or better quality of and lower prices of competing products. They also locked out owners of non-iPod portable digital media players who had downloaded songs from the Real store. The effect of both lock-in and lock-out, plaintiffs say, was to reduce competition in the market for digital portable music players and to reduce the price elasticity of iPods, which permitted Apple to charge a supracompetitive price therefor.

While other DRM situations may not be quite as involved, the idea of using DRM as a form of lock-in, increasing switching costs is clearly a legitimate concern. Having DRM present a potential antitrust concern could make for some interesting situations for companies today who rely on DRM.

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Companies: apple, realnetworks

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Comments on “Apple Facing Trial Over Whether Its Use Of DRM Violated Antitrust Laws”

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Anonymous Coward says:

even if the case goes against Apple and therefore really, against the labels, what ever decision is made it will be done so that it’s under seal or similar so no one can then use it to there advantage and get the DRM removed. after all, the protection on music and movie disks is done to stop anyone and everyone from being able to supply them to customers unless exorbitant amounts of money has been paid to the labels and studios first. neither the labels or the studios want to supply any customers with reasonably priced material but they dont want anyone else to either, unless their demands for sky-high prices have been met first! that removes almost all chance of a low priced disk and the opportunity to make a small profit. as usual, greed takes over and sense runs out the room!

Mason Wheeler (profile) says:

Why does this have to be so complicated?

Here’s a much simpler solution: DRM, by definition, is malware. Its only reason for existence is to cause someone else’s computer (ie not belonging to the author of the DRM’d software) to be less capable and to refuse to do what the computer’s owner wants, unless the computer owner complies with the arbitrary wishes of the DRM author. On a conceptual level, this is nothing but an act of hacking, no different from ransomware.

As such, the use and distribution of DRM should be illegal. Period. Then we wouldn’t have to worry about arcane details of antitrust law. Does Apple put DRM on its products? Yes. Then it’s in violation of the law.

See how simple that is?

Donglebert The Needlessly Unready says:

Re: Why does this have to be so complicated?

I don’t entirely agree. If the DRM using applications, in this case iTunes and RealPlayer, add DRM to previously DRM free files on your computer, then it’s an issue and arguably malware.

If, however, you bought the file with DRM already on it (and it was advertised as such), then it’s not malware. You’ve just bought something that doesn’t meet your requirements.

The bit that makes this case interesting is that it was DRM vs DRM, not DRM vs open, and that Apple changed there code in order to prevent previously valid files from playing. That is arguably adding an element of malware to the iTunes software itself.

Ninja (profile) says:

Re: Why does this have to be so complicated?

It will not be as easy. I don’t think that a law forbidding DRM would go far. However the legislative could propose a bill that would force DRM to be available to any party willing to make the content available in their platform. This would prevent monopolies from forming like the one Apple held.

I also think that copyright content should be forced to offer the same licenses and pricing for everybody and it should be fair and scaled with size of said services. And it should be compulsory. Or, you know, copyright should be scrapped and abandoned.

nasch (profile) says:

Re: Re: Why does this have to be so complicated?

I don’t think that a law forbidding DRM would go far.

And it’s not necessary. Just remove the DMCA’s penalties for circumventing DRM, and the problem will go away. With no legal hammer, publishers wouldn’t be able to stop anyone from removing DRM, and eventually* even the thickest of them would realize it’s pointless.

* possibly for very large values of “eventually” but I think the bulk of them would move fairly quickly to ditch DRM

Whoever says:

What this shows

“It didn’t take long for most people to recognize how the labels’ own demands for DRM actually gave Apple tremendous leverage over the record labels”

The execs at the record labels really are idiots. In their desperate desire to prevent piracy, they handed the market over to one monopoly vendor, to their own detriment.

antidirt (profile) says:

Amazon might want to pay particular attention. . . . Having DRM present a potential antitrust concern could make for some interesting situations for companies today who rely on DRM.

No comment on the merits of these claims? Of course not. Just some FUD about how those that use DRM “might way to pay particular attention” and a vague suggestion of “a particular antitrust concern” that “could make for some interesting situations.” Journalism! That’s some awesome analysis, Mike.

John Snape (profile) says:

I remember when I started getting files, mostly music videos, from iTunes, and I was upset about the DRM. So I started up my packet-recording software and watched what came through when I downloaded the files. Surprisingly, the packets came through unencrypted and the file would be encrypted once it was on my machine.

Then I installed the FileMon program from SysInternals, so I could see where the program was storing the temporarily-unencrypted file before encryption and the temp file was deleted. As soon as iTunes told me it was ready to watch, I ran an undeleter on the temp file and had it free of DRM.

So does my explanation of it (even though they might have changed there process since) mean I just broke the law?

Groaker (profile) says:

Re: Re: Re:

That is a banal excuse of the acceptance of DRM. With little effort and inconvenience, one can legally avoid or minimize providing profits to those who utilize DRM. CD’s can be purchased 2nd hand, as can DVDs, books and other items. It is the unwillingness to do without that allows the DRMers to stay in business. For myself, I haven’t purchased a DVD ever. I have bought 1 CD first hand since 1999 because of abuse of copyright. Libraries and the ‘net make books available at no cost. While a library pays one fee for a DRMed object, it is split tens of ways. Lawful sharing on a personal level has the same effect.

DRM is endorsed and paid for by those consumers who are too lazy to fight back.

John Fenderson (profile) says:

Re: Re: Re: Re:

“DRM is endorsed and paid for by those consumers who are too lazy to fight back.”

Lazy? That presumes that everyone feels as strongly about DRM as you. I think that’s obviously not true. I think DRM is idiotic and reduces the value of whatever it touches, but I don’t think it’s some sort of moral disaster that requires a full battle.

I buy DRM’d eBooks not because I’m too lazy to fight back, but because my personal cost/benefit analysis comes out in on the side of “ignore and work around” it. If the DRM wasn’t removable, that would dramatically change my analysis and I’d stop purchasing such eBooks.

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