Thu Nov 06, 2008 9:49 pm

Apple to Norway, "Buh-bye."

Fri Nov 07, 2008 2:19 pm

Dear Consumer Ombudsman Thon: To begin with, songs purchased on iTunes can be played on other music players, after the consumer records their song to a CD. So I suppose your objection is as follows: Is it right to require that a consumer must transfer his or her songs to CD before he or she can play those songs on an MP3 player other than an iPod/iPhone (iPod)? The answer to this question is most certainly yes for several reasons:

First, Apple's contracts with the major media companies, at least two of which are European, require that Apple encode music in DRM and make Apple liable for any breach of that DRM that allows copying of music that caused damage to the record companies. Thus, Apple's contractual arrangements not only require DRM, they also require that it be effectively secure. Therefore, unless the Commission is going to relieve Apple of its contractual obligation to provide an effectively secure DRM, while still requiring the media companies to license their content to Apple, it should not, as a matter of law, require Apple to license FairPlay, and it should not do so as a matter of common sense.

Second, the FairPlay DRM that Apple uses is Apple's intellectual property and was perfectly legal under Community law when Apple introduced the iTunes Store.

Third, by using its own DRM encryption, Apple guarantees compatibility between its iTunes Store and its media players, is free to innovate in producing both the iTunes Store and its media Players, which produces a more elegant, powerful and intuitive experience for the consumer, and is able to guarantee for the record labels that FairPlay is secure or that it can repair any hack of FairPlay's security before any real damage is done to the artist and media companies' financial interest in their copyrights. If the Commission, however, forced Apple to license FairPlay to others, it would be extremely difficult, if not impossible, for Apple to guarantee FairPlay?s security and for Apple to repair any hack of FairPlay?s security across the innumerable range of third party hardware and online music stores that would result from the broad licensing of FairPlay.

Fourth, any consumer, who is unimpressed with the innovation of Apple's media players and/or the iTunes Store and finds that transferring music to a CD before transferring it to another MP3 player is too burdensome, can buy an MP3 player that uses Microsoft's Play-For-Sure scheme, which several makers of MP3 players and online music store use, and thus, have a music collection that plays on any device that has Microsoft's Play-For-Sure license. Of course any consumer who owns a device, such as the iPod, which does not have a Play-For-Sure license, can't play music on his iPod that he purchases from any online music store that use the Play-For-Sure DRM. But apparently most european consumers are happy with their iPods and iTunes. For why else would they overwhelmingly choose them over competing media players and online stores, which can play music from any of Microsoft's Play-For-Sure licensee online media stores? Unless, the Commission can answer this question, any requirement that Apple license FairPlay appears to the be officious meddling in pursuit of some quasi socialist agenda that ignores that consumers have voted with their purchases that iTunes and FairPlay provide the greatest consumer welfare.

Fifth, even if the Commission required Apple to license FairPlay for the fair costs of licensing FairPlay--which includes the costs of developing FairPlay, the costs of repairing any hack of FairPlay, the costs of supporting innumerable licensees, the risks of financial liability to the media companies for any breach of FairPlay, and Apple's entrepreneur's costs (i.e., a fair return on its investment) of its FairPlay--the online stores would not license it, because the record companies take so much revenue from the online stores' sales that they can't afford to license it, and the parties that could afford to license it, such as Microsoft or, perhaps, the makers of cell phones, would not license it at fair costs, because they can do it more cheaply themselves and with greater control over their own products and business models. And thus, the Commission would do a vain thing, since no one will license FairPlay at its fair costs, unless the Commission plans to simply expropriate FairPlay by requiring Apple to license it and bear the costs of supporting innumerable third party OEMs--something which is quite expensive--without allowing Apple to charge a fair royalty for licensing FairPlay. In which case, everyone will license it. Of course, under those ruinous terms, Apple would have no choice but to withdraw from the European market.

Sixth, requiring Apple to license FairPlay at a fair costs would not only be a vain thing, it would also be grossly inequitable, because, as the holders of the copyrights, it is the media companies, two of which are European, who exclusively have the legal right to require their licensees to use an interoperable DRM and are the companies that most benefit from DRM. When the media companies were losing their business because of pervasive piracy of their music, Apple arrived with a solution for providing a legal alternative to piracy that allowed the record companies to collect royalties for their music. Apple would devise the method of DRM and be liable for any breach thereof, and it would establish an online music store, and it would do all of this at its expense. In return, for licensing their music, the record companies get approximately 72 cent of every 99 cent of sales from the iTunes Store. Now, if the media companies really wanted interoperable DRM, they could simply devise their own DRM, as they have done for DVDs, and require that their licensees to use it. That is why a DVD, except for regional restrictions, works in any manufacturer's DVD player. Of course, that would mean that the media companies would have to bear the costs of developing, deploying, supporting, and defending their DRM against hackers. And, of course, the media companies would also have pay the costs to their good will and the legal costs, as they, instead of Apple, became the target of the strident anti-DRM forces (i.e., those who do not that the choice whether to buy the iPod/iPhone should be decided by the competitive market) both in and out of government. It is instructive to note that none of the media companies want to abolish DRM, except where they've secured a license that will let them charge whatever they please for digital content. They only want government to expropriate Apple's DRM, FairPlay, on their behalf without providing any compensation to Apple, their erstwhile savior who provided the only successful, legal online media store.

And last, but hardly least, is that expropriating FairPlay from Apple will do severe damage to consumer welfare. Though the media companies get a king's ransom for licensing their music and other content to Apple for sale on the iTunes Store, they want even more money, as their greed is limited only by what the market, under monopoly or oligopoly conditions, will bear. The media companies expected that Microsoft and its minions would be able to offer competing products that consumers wanted to buy, which would open the way for the media companies to use their market power, as owners of the copyrights, to deploy pricing schemes that charged prices that maximized the amount of revenues on what they expected would be a monopolist's demand curve. But lo and behold, Apple prevailed in the market place by licit means, which, from the perspective of the media companies, was not a bad thing per se, but became intolerable once Steve Jobs insisted on transparent and simple pricing that allowed consumers to own their music. In short Apple, because it makes it money selling hardware and not content, has an incentive to use its market power to negotiate for consumers the best deal that they are likely to get on the price of digital content and on limiting the restrictions on how they use digital content. If the Commission destroys, Apple's market power, Apple will be fine, because it has shown that it can win the competition for media players on the merits, but the consumer will get savaged by the media companies. Neither the online stores or Microsoft, as the maker of the most draconian DRM, have any incentive to negotiate on behalf of consumers, and the Commission, if it achieves interoperable DRM, has not legal authority to control what the media companies, as copyright owners, charge for purchasing music and other content or even require that they allow purchasing of content as opposed to subscribing to content. The result will be that those consumers who choose to legally acquire their content will do so at prices much higher and under terms much more onerous than those found at the iTunes Store.

Thus, if the Commission abandons well settled principles concerning market competition--dominance in a market is legal, if obtained by building a better product that consumers prefer--and the rights incidental to the ownership of intellectual property to force Apple to license FairPlay at an unfairly low costs or for free, it will destroy Apple's market power to negotiate for consumers, allowing the media companies to charge consumers the highest reservation price for their music and their other content. Only Apple has the incentive and the market power to negotiate on behalf of consumers, because it has been the winner in a fair competition in the market for media players and because it makes its money selling media players, and not content. If the Commissions makes Apple license FairPlay, the other actors, Microsoft and the other online stores, make their money from the revenues associated with selling or leasing content and, thus, have every incentive to conspire with the media companies to increase the price of content and restrict the terms for using content. Therefore, since the Commission has no authority to either to restrict the price that a copyright holder charges for his or its works or to require that a copyright holder sell, as opposed to lease, its works, the Commission and others should not interfere with Apple's present use of FairPlay, because this is the best deal that consumers can get. But if the Commission insists on forcing the use of interoperable DRM, the only effective course of action, aside from expropriating FairPlay by forcing Apple to license it for less than a fair royalty, is to require the media companies to produce their own DRM and require their licensees to use it, as they now do for DVDs.