Europe Not Humming Apple's iTune - TheStreet

Europe Not Humming Apple's iTune

CEO Steve Jobs' digital music essay proves some major obstacles exist overseas.
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Apple's

(AAPL) - Get Report

system of locking songs sold on its iTunes music store to its iPod portable music player has some European regulators crying foul at a time when the region has helped the company push sales into the stratosphere.

European officials want Apple to open up its digital rights management system, called FairPlay, so songs sold in the iTunes Music Store can be played on other MP3 players -- and songs purchased from other digital music stores can play on iPods.

In countries such as France, Norway and Germany, among others, consumer advocates and government officials have taken various degrees of action to push Apple to interoperate with competitors.

The situation is complicated because individual countries have different laws, but on the whole, "Europe has stronger regulations about tying products together than the U.S. does," says Jason Schultz, an attorney with the Electronic Frontier Foundation, a digital rights nonprofit organization in San Francisco.

Recognizing the possibility of legal action in multiple countries over the digital rights management system, CEO Steve Jobs on Tuesday posted an unusual

plea to the major music labels to sell their music without copy protection in place.

"DRMs haven't worked, and may never work, to halt music piracy," Jobs wrote Tuesday on the Apple home page. If the "big four" music labels (Vivendi's

Universal

,

Sony

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BMG,

Warner Music Group

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and

EMI

) stopped mandating DRM for its songs, Apple would happily sell music in an open format, he wrote.

The apparent change of heart "is an interesting way for him to shift the argument -- or the blame -- to the record labels," says Richard Stice, an equity analyst with Standard & Poor's. "I think it's a pretty smart move."

"It's critical that (Apple) be viewed as being pro-consumer because that's where the majority of their customers come from," he says. Stice does not own Apple shares and his firm does not do investment banking.

iPod sales in Europe helped Apple post record sales in its latest

December quarter. The Cupertino, Calif.-based company sold 21 million iPods overall, a 50% boost over the same period a year ago.

"IPod shipments grew even faster in international markets, which resulted in share-gains in every country for which we have market data," CFO Peter Oppenheimer said on its latest earnings call, according to SeekingAlpha.com. "This gives us confidence that our emphasis on advertising, channel development and improved supply in these markets has been effective."

On the call, Apple Chief Operating Officer Tim Cook said that iPods in the U.K, Switzerland, Canada, Australia and Japan have all pushed past 50% of the digital music player-market share. France, Germany, Italy, Spain, Belgium, Sweden, Austria and Denmark all gained between 10 and 20 percentage points of share in the quarter year over year.

Peeling Apple

Richard Staeuber, a lawyer and Ph.D candidate at the University of St. Gallen in Switzerland, has been researching interoperability in the European music market and says there have been several approaches to challenging Apple: confronting the issue through consumer protection, copyright or antitrust laws.

Norway's consumer ombudsman said recently that iTunes violates the country's consumer-protection laws and that Apple has until October to open up its music store or end up in court, Staeuber says. Meanwhile, consumer organizations in Germany, France and Finland have joined the Norwegian consumer ombudsman in his demand for interoperability.

France has introduced an interoperability clause in its copyright law that would require DRM-protected products (such as Apple's) to disclose interoperability information to its competitors if the rival wants to introduce a compatible product, Staeuber says. France created a special agency to oversee the process.

A previous antitrust case in France between Apple and VirginMedia, where Virgin demanded that Apple license its DRM, ended in Apple's favor partly because the French competition authority found "the market was sufficiently competitive," he says. "Whether the authority would now say that Apple is dominant and should therefore display interoperability is an open question."

Apple observers say there are things the company could do now to show it's serious about selling unchained music, which could help Apple's position in Europe.

"I think he's being truthful about everything that he

Jobs says -- DRM is broken, it's not an effective business strategy, and it was part of the deal the major label required," EFF's Schultz says.

But if Jobs really wants to take a stand, he could make the DRM optional for independent artists who sell their music in iTunes, and are not bound by the labels' copyrights, Schultz says.

Currently, iTunes wraps songs in DRM whether an artist wants it or not, he says.

"I think that would go a long way to convince the

European Union that Apple's not the problem here," Schultz says. "If he takes that kind of step, I think it sends the right message to European regulators."

Apple shares added 60 cents to $84.75 in recent Wednesday trading.