If iPod/iTunes Music Store Is Anticompetitive, Microsoft's PlaysForSure Is Even More So

Judge James Ware of the US District Court of Northern California says a lawsuit against Apple for "tying" can go ahead. The suit alleges that Apple's iPod and iTunes Music Store are tied together in such a way that they violate the Sherman Antitrust Act.

The Wikipedia entry for tying states, "Vertical tying is the practice of requiring customers to purchase related products or services from the same company."

It's something we're all familiar with. If you buy Product A, you have to buy Product B. For example, if you buy an iMac Core Duo, you must use Mac OS X (at least so far), so your OS upgrades are tied to the company that made the hardware.

In a similar way, many Windows PCs are tied to Windows. If you want to order them without Microsoft's ubiquitous operating system, you may not save any money at all - and in some cases will pay more. And in some cases the vendor simply won't sell you the computer without Windows.

Another example: Microsoft's Access database is part of the Microsoft Office bundle for Windows. As users become dependent on their Access databases, they limit themselves to Windows PCs because Microsoft chooses not to make this popular database available for the Mac. Switching hardware and operating systems would also mean switching databases.

Digital Restrictions

Apple's iPod is tied to Apple's free iTunes software. Apple's iTunes Music Store is tied to Apple's free iTunes software. Thus, the lawsuit contends, the iPod and iTunes Music Store are tied together.

If that's true, then Microsoft's PlaysForSure initiative is even more strongly tied together than Apples iPod/iTunes/iTMS trio.

PlaysForSure is tied to Microsoft Windows. If you buy PlaysForSure restricted tunes, they can only be played on Windows computers and PlaysForSure music players. If you buy a PlaysForSure music player, you can only use it with a Windows computer and a PlaysForSure music source.

If you own a Mac, a Linux computer, an iPod, or a pre-PlaysForSure music player, you're out of luck as far as PlaysForSure hardware and download services go.

Microsoft and their partners will quickly point out that there are multiple music suppliers and multiple music player vendors, which they say differentiates them from Apple's situation. And they're right - the choice of any PlaysForSure music source doesn't tie you to a specific brand of player (and vice versa).

However, the choice of PlaysForSure does tie you to the Microsoft Windows operating system ties you to the use of PlaysForSure hardware and services so you can continue using what you've already purchased.

Two DRM Standards

It's a fundamental principle of capitalism that competition is good, because it will keep prices down, drives innovation, and provides choices. The fundamental choice here is between two different ecosystems, two different and competing standards for restricting the use of digital music.

Apple's standard, known as FairPlay, is tied to their iPod, their iTunes Music Store, and their free iTunes software, which runs on both Macs and Windows PCs.

Microsoft's PlaysForSure Windows Media standard is tied to the Microsoft Windows operating system, Microsoft's media player, Microsoft licensed PlaysForSure music players, and Microsoft licensed PlaysForSure music services.

Just as the choice of an iPod places one in the FairPlay realm, the choice of a PlaysForSure player puts one in Microsoft's DRM ecosystem. If what Apple has created and the market has resoundingly embraced is a closed (tied) system, that's no less true for PlaysForSure, which actually ties you to a particular computing platform, not just a family of music players and music services.

Proving Tying

The burden will be on the plaintiff to prove that Apple's closed system is anticompetitive, which means that not only does it have to look at the ties between the iPod and iTMS, but also the competing PlaysForSure ecosystem.

If iTMS has 80% of the music market and the iPod has 90% of the player market, as the plaintiff contends, then the competing PlaysForSure music services must account for the vast majority of the remaining 20% of online digital music sales. And they own 100% of the subscription-based market, since there is no subscription-based service within the FairPlay ecosystem.

The plaintiff must also provide evidence that there is an iPod/iTMS connection, not merely conjecture that 80% of one market and 90% of a related market are necessarily tied together.

Some iPod owners don't buy from iTMS. Some iTMS customers don't own iPods. That has to be quantified in some way, but the simple fact is that use of an iPods doesn't imply use of iTMS (and vice versa). Maybe only 80% of iPod owners buy from iTMS while the rest simply rip their CD collections. Maybe 20% of iTMS customers don't own iPods but choose to listen to their purchased material on their Macs, Windows PCs, or CD players (after burning them to CD).

The Numbers

The numbers tell us that there were 42 million iPods out there at the end of 2005, and Apple is getting close to the 1 billion download mark for iTMS. Using our 20% guess, let's say there are 35 million iPods in use and that 800 million iTMS tracks reside on those iPods. That implies that the typical iPod owner has purchased 23 tracks from iTMS.

Realistically, we all know more and more iPod owners who have two (and sometimes more) iPods. Let's make the wild guess that 50% of iPod owners have one player and 50% have two. That puts us at roughly 24-25 million iPod owners as customers of the iTunes Music Store. And that raises the tracks per customer level to 40 on average - about what you'd get on 3 CDs.

I'm sure Apple has the hard numbers, but if they have more iTMS customers than iPod owners, they've begun to undermine the plaintiff's arguments. And if they have significantly less iTMS customers than iPod owners, they've also undercut his claims of tying. It will be interesting to see what those numbers reveal.

Lies, Damn Lies, and Statistics

Here's the kicker that should demolish the plaintiff's claims: People are buying iPods (and iTunes compatible cell phones) that can hold 100 to 15,000 songs. They have spent US$100-600 to purchase these iPods so they can listen to their music on the go, yet on average they have only spend US$40 to buy 40 tracks from Apple's iTunes Music Store to play on these devices.

Surely they're listening to more than just the tracks they've bought from Apple. In fact, most iPods have room for 500+ tracks, and most iPod owners I've talked to have over 1,000 tracks on their iPods.

If that's true, and I hope Apple's lawyers will have the numbers, then tracks purchased from iTMS account for less than 4% of the music on the typical iPod.

If there's an iPod/iTMS tie, why isn't that number a whole lot higher? Are iPod owners not only ripping their existing CD collections but also continuing to buy CDs?

There goes the plaintiff's case. No matter that iTMS is the only online music source for iPods, the simple fact remains that the bulk of music being put on iPods is coming from CDs, not iTMS.

Because iTunes provides a completely independent method of putting digital music on the iPod (that is, ripping CDs), iPod owners do have an alternative to iTMS. And because iTunes can burn CDs from material purchased through iTMS, they only need a CD player - not an iPod - to listen to their material away from their computers.

One More Thing

Finally, Apple could argue that FairPlay is less restrictive than PlaysForSure. Although FairPlay is tied to iTunes, iPods, iTMS, and a few cell phones, it isn't tied to a specific computing platform. You can install the free iTunes software on both OS X Macs and Windows XP computers.

While Microsoft's PlaysForSure lets you choose from multiple vendors for your player and music, it absolutely restricts you to Microsoft Windows computers. Whether Microsoft makes a penny from licensing PlaysForSure to music player makers and online services or not, it's tied you to Windows computers, and that tie lines Microsoft's pockets.

In the end, it comes down to choosing one of two DRM ecosystems: FairPlay (iPod + some cell phones, iTMS, and iTunes for Mac or Windows) and PlaysForSure (multiple vendors but Windows only). One system makes its money from the music and the players. The other makes its money by locking you into an entire computing platform.

Now there's grounds for an antitrust suit. 

• Link: Tying, Wikipedia
• Link: Antitrust Suit Against Apple Over iPod, iTunes to Proceed
• Link: Northern California Judge Gives Green Light to Monopolization Suit Against Apple
• Link: Is iPod, iTunes, iTunes Music Store A Monopoly?
• Link: Seven Tips for Buying an MP3 Player