Apple and Virgin Mega in Music Dispute

Virgin Mega apparently sought licensing of FairPlay from Apple prior to the launch of the iTunes Music Stores (iTMS) in Europe. When Apple refused, Virgin Mega decided to try to force the issue through French legal channels. A hearing on Virgin's complaint is expected late in the year.

In late July, RealNetworks released Harmony Technology, which enables users to play music purchased from Real's online music store on the iPod. Previously, only songs purchased from Apple's store could be played on the iPod. To accomplish the feat, Real was forced to reverse-engineer Apple's software.

Protecting iPod Profits

Apple's FairPlay allows users to purchase songs legally from the iTMS and listen to them on the iPod. No other music stores have licensing to distribute music for the iPod.

After the release of Harmony, Apple blasted Real and threatened to disable Harmony via software updates to iPod users. Apple has also hinted that it may entertain legal action against Real under the Digital Millennium Copyright Act.

In a filing with the Securities and Exchange Commission for the third quarter of 2004, Apple showed a profit from the iTMS, something CEO Steve Jobs had said he did not expect to see. Since the launch of iTMS, the company has used the service to drive iPod sales. The company sold more than 800,000 of the devices in its most recent quarter.

Business Strategizing

Gartner (NYSE: IT) senior analyst Michael McGuire believes that Apple may have good reasons for its refusal to license FairPlay.

"At some point, Apple may want to license [FairPlay] if there is a good business argument," McGuire said. "If a company approaches Apple and does not have a good business plan for the licensing, perhaps that is why they are refused."

Real, meanwhile, has its own strategies. "Real would have several motives behind building Harmony, but one is to force Apple to the negotiating table on the licensing of FairPlay," Goodman said.

No De Facto Standard

While McGuire thinks it is too early in the game to identify the iPod and iTunes as the de facto standards in digital music, he assumes that that is Apple's goal.

"In volume, Apple probably does have the lead," McGuire said. "I would argue, though, that in many cases, users have all three players on their PC's: iTunes, Windows Media Player and Real."

Yankee Group's Goodman explains that emerging markets such as digital music often form around proprietary standards.

"This is no surprise. From a market development perspective, we are right where we ought to be," Goodman said. As the market matures, other influences will come to bear. Record companies may not care so much about DRM now, but they will as the industry evolves. "Many players take part, from government, to content creators, consumer groups and so on," Goodman said. "In my opinion, licensing will ultimately occur, as the content creators will want flexibility."

Interoperability: Pros and Cons

McGuire thinks consumers would benefit if Apple licensed rights and iTMS competitors launched big marketing campaigns. "It would make the world more interesting for iPod users," he said.

He cautions, however, that while many have pointed to the advantages of interoperability, few have counted the costs.

"Interoperability is one thing, but delivering and supporting it is another. Perhaps Apple is wanting those who seek to license FairPlay to share in the costs of doing so," McGuire said. "Something will inevitably go wrong, and there will be support and engineering costs and distribution. Who pays for that?"