Is Apple Playing Fair? Navigating the iPod FairPlay DRM Controversy

Abstract

On April 2, 2007, Apple Inc. and EMI Music held a joint press conference in London that may be the harbinger of significant changes in the digital music arena. This press conference, whose attendees included EMI Group CEO Eric Nicoli and Apple CEO Steve Jobs, unfolded in an environment of significant technological and commercial changes in the music industry. The shift to the digital era has been a turbulent one for many players in the music industry, particularly as a result of the widespread distribution of unauthorized digital music files and the concurrent significant decline in record industry sales. The Apple-EMI agreement permits Apple to sell EMI Music's entire digital music catalog without digital rights management (DRM), which represents a significant shift from the previous policy of the major record companies. The Apple-EMI announcement should be considered in light of the recent developments in the broader digital music market. Although Apple has now agreed to distribute music from the EMI catalog without DRM, many believe the technological choices that Apple has made in the past surrounding DRM technology have laid the foundation for Apple's market dominance. Until now, Apple has facilitated its market dominance by deliberately limiting interoperability with non-Apple devices and non-Apple online music stores for iPod device and iTunes Music Store ("iTMS") users. Apple's bundling of the iPod and iTMS, which together form a network, has led to lawsuits against Apple alleging antitrust violations ranging from tying to attempted monopolization; some foreign jurisdictions have gone so far as to threaten to ban certain Apple technologies on consumer protection grounds. This Article lays out the topography of the Apple FairPlay controversy, looking closely at the business and market environment within which the iPod/iTMS network arose. This Article outlines some ways in which existing legal frameworks may be applied to the structures and behaviors associated with companies' development of technological and business innovations. It also analyzes the antitrust allegations against Apple and examines Apple's behavior and success in light of the network effects produced by the iPod/iTMS bundle.

Keywords: networks, network effects, intellectual property, music industry, Apple, iPod, iTunes, digital music, DRM, antitrust, competition law, tying, bundling, interoperability

JEL Classification: K11, K21, K49