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Following up on a consumer watchdog group's complaint filed two years ago, the European Commission (EC) is objecting to the way Apple's (Nasdaq: AAPL) iTunes store sells music in Europe.
The EC is the executive body of the European Union (EU), and has extensive powers relating to business practices that violate EU treaties and policies.
The EC's "Statement of Objections" against Apple and the major music labels whose wares are sold in Apple's online iTunes store is the first phase of a formal complaint. The commission, reacting to a complaint filed in 2004 by the UK-based consumer watchdog group Which? is questioning "territorial restrictions in online music sales" through iTunes.
"The European Commission can confirm that it has sent a Statement of Objections to major record companies and Apple in relation to agreements between each record company and Apple that restrict music sales," said an EC statement. "Consumers can only buy music from the iTunes' online store in their country of residence. Consumers are thus restricted in their choice of where to buy music, and consequently what music is available, and at what price."
Treaty Violation
The EC asserts in its Statement of Objections that these agreements between Apple and the music labels "violate the EC Treaty's rules prohibiting restrictive business practices (Article 81)."
Apple sells music downloads through a number of iTunes stores in the European Economic Area (EEA). In possible violation of the EU's Article 81, the various iTunes stores determine each consumer's country of residence by using their credit card information and allow the prospective customers to buy only from the iTunes store in their country.
"For example, in order to buy a music download from the iTunes' Belgian online store, a consumer must use a credit card issued by a bank with an address in Belgium," said the EC.
The problem with that system, from a music-buyer's standpoint, is that a song will cost more in one country than in another.
"In 2004 Which? found that in the UK iTunes was charging customers 79 pence (approximately 120 euro cents or US$1.60) to download one track," explained the consumer group in a statement. "In both France and Germany the cost was just 99 euro cents ($1.32), leaving UK consumers to pay a price differential of around 20 percent more for an identical service."
Stuck in the Middle?
Apple could not be reached for comment, but it reportedly is asserting its hand was forced by the music labels who said the separate stores were necessary for legal purposes.
The EC's action is good news, Which? Principal Economist Alena Kozakova told MacNewsWorld. Apple could be found guilty of territorial restriction even if it was made to do so by the music labels, she added.
"It may be true that actually they didn't initiate it," Kozakova said. "However, under the European Union law, if you conclude an agreement you know restricts competition, you are as guilty as the other parties involved. It's extremely difficult to ascertain in whose interest this agreement was, but just a statement by Apple, unfortunately, will not do it."
Separate by Design
It doesn't make sense for the EC to question Apple about the situation, according to Martin Olausson, director of digital media strategies for Strategy Analytics.
"When I first looked at it, I thought it a bit weird they would attack Apple like that," Olausson told MacNewsWorld. "I totally understand how the music industry cuts the market up in different territories, which is limiting competition. But that's been in play for the last 50 years ... and any retail store or online music store -- Apple or anybody else -- would love to have one European facility."
The EU's goal of a European standard is great "if it meant the same pricing and access to the same content," he noted. However, there are so many regional and national differences in music throughout the 27 states it makes little sense for one entity to purchase license rights for all music being sold across the continent, Olausson pointed out.
"If you have an iTunes in Italy, you want to license Italian music because some of that is selling really well in Italy," said Olausson. "You just want a local license ... I'm a bit surprised that the EC has chosen to attack both Apple and the music companies. I don't understand the concept."
Knowledge From the Outset
However, Kozakova said she and others at Which? were not swayed by Apple's assertion it wanted to have one EU iTunes store but couldn't.
"We all read Apple's statement ... where they said they wanted to clarify that they wanted to have an EU-wide shop. But they never concluded that agreement and this is not going to help them very much. They may get a reduced fine, but the fact that they concluded an agreement they knew restricted competition is problematic," she said.
The EC noted its Statement of Objections "does not allege that Apple is in a dominant market position and is not about Apple's use of its proprietary Digital Rights Management (DRM) to control usage rights for downloads from the iTunes online store."
The targets of the investigation have two months to "defend themselves in writing," and they can also ask the EC to conduct an oral hearing. "Only after having heard the company's defense can the Commission take a final decision, which may be accompanied by fines of up to ten percent of a company's worldwide annual turnover," said the EC.
