TCS Daily


The Apple of His IP

By Michael Rosen - May 17, 2006 12:00 AM

According to the adage -- when it rains, it pours. In the case of Apple Computer, when it pours, it deluges.

Over the past few months, the iPod maker has found itself seeking shelter from an intellectual property storm of near-Biblical proportions involving trademark, copyright, and patent law.

Apple's dynamic iPod-iTunes one-two punch has transformed the company into arguably the most important player in the entertainment universe.

The numbers alone are staggering: users have downloaded more than one billion songs from iTunes, an amount equal to 6 percent of the entire music industry's revenue. Between the second fiscal quarter of 2005 and Q2 of 2006, sales of Apple's Macintosh computers -- once the company's flagship product -- grew by only 4 percent while iPod sales surged by 61 percent, accounting for a yearly revenue growth of 34 percent (more than $1 billion).

The iPod's popularity, of course, extends internationally. Foreign sales made up 43 percent of total sales in the second quarter of FY06, up a bit from the previous year.

So there was great concern when British music studio Apple Corps -- the storied label that represents The Beatles' legacy -- sued Apple Computer for violating a 1991 agreement that it claimed prevented the computer maker from using its trademarked logo in connection with the music industry in Britain.

The High Court of Justice, however, distinguished between the creation of musical content (Apple Corps's field) and its transmission (Apple Computer's area). According to the court, "the mere running of a data transmission service, transmitting musical content, under a Computer apple mark would not, of itself, be a breach" of the 1991 agreement. No word, though, on whether Apple Corps will, at long last, make Beatles' songs available on iTunes. (There was also some light-hearted speculation that John Lennon himself invented an iPod predecessor in 1968).

But no sooner had Apple fended off the trademark challenge than it found itself enmeshed in another European close encounter -- this time of the copyright and patent kind: the French plan to uncouple iTunes from the iPod.

The controversy stems from Apple's decision to package its iPod hardware with its iTunes software: there's no (authorized) way to load music onto an iPod without using iTunes.

Known as a "bundling" arrangement, Apple's approach is perfectly common in the computing and high-tech worlds. Although in the "old economy" such integration would have implicated antitrust concerns, it's SOP in today's world. Tech companies contend, with justification, that bundling lowers costs for consumers, facilitates use of products, and drives further innovation.

Bundling also involves the wily art of being clever without being greedy. Recognizing key synergies from the iPod-iTunes combo, Apple has kept them tightly unified: a clever move. But Apple also makes iTunes available on both PC and Macintosh operating system platforms: another smart choice.

Had Steve Jobs and company gotten greedy, they could have made iTunes available only on Macs, thereby forcing anyone using an iPod to purchase Apple's own computers. But the company instead wisely realized that despite the inherent superiority of the Mac (trust me on this one: I've been a Machead since the days of the Apple IIc; I still fondly remember the day in 1988 that my father brought home a Macintosh II), it accounts for less than 3 percent of the worldwide personal computing market and less than 6 percent of the U.S. market. Of course, this hasn't stopped Apple from marketing its OS to iPod-iTunes users on the assumption that customers who appreciate the simplicity and elegance of the music player and its software will want to invest in a similarly easy-to-use computer platform.

In any event, Apple has struck a near-perfect balance that has maximized convenience for users, dramatically reduced piracy, and locked in $1-per-song music and $2-per-video television for the past five years.

This balance was implicitly supported by a recent Supreme Court decision striking down a 60-year-old precedent that applied a presumption of antitrust law against patent-holders who bundle unpatented products with their patented ones. In rejecting this presumption, the Court (unanimously) credited the arguments of the computer industry and concluded that "many tying arrangements, even those involving patents and requirements ties, are fully consistent with a free, competitive market." This decision indisputably provided a boost to Apple's practice of tying the iPod to iTunes -- at least in the United States, that is.

But earlier this year, the parliament of France announced its intention to sever the link between the iPod and iTunes in the name of strengthening the country's digital rights management (DRM) regime. DRM encompasses everything from copy protection to access rights to license agreements involving digital content.

The French plan initially was to compel digital music providers like Apple, Sony, and Microsoft to disclose their proprietary DRM protocols to one another and to other competitors. This would ostensibly enable greater competition among the music providers by delinking their devices from their software. The bill passed the National Assembly, the lower house of Parliament, in March.

Given that iTunes is the largest digital music vendor in France, the government's move can be interpreted as an attempt to boost VirginMega, the Virgin Group's joint venture with local company Lagardère into French online music. The French are also famously protective of their art and culture; it's hardly surprising that they would erect barriers to the success of foreign companies in the creative fields (think of the restrictions placed on films emanating from a certain corner of the Los Angeles basin).

But Apple, along with its American rivals, has fiercely -- and quite correctly -- opposed the DRM legislation. The iPod maker referred to it as "state-sponsored piracy" because, in forcing the interoperability of music, it would leave all DRM protocols vulnerable to hacking. With a single standard, intruders could more easily access entire libraries of digital content.

Apple may even surrender the French market if it has to turn over its protocol. As an industry advocate noted, "All legitimate businesses that operate in France and use legitimate technology protection will have to ask themselves...is it worthwhile [doing business] in France?"

Moreover, there's little reason to believe that the market for digital music in France is insufficiently competitive. Apple sells music for €0.99 (about $1.29) per song and video for €2.49 ($3.21) per clip. These rates are only slightly higher than what Americans pay for the same content. If the French bill becomes law and ends up pushing companies out of the market, competition will be severely undermined.

The legislation exhibits a reflexive opposition to proprietary software -- ironically, in the service of proprietary content. (Interestingly, hundreds of demonstrators gathered in Paris last Monday to protest the bill from the opposite perspective and to lay a wreath, as the BBC reported, "in memory of private copying and free software in France." These days, of course, it takes very little to get a mere 300 people to protest something in Paris.)

Unfortunately, unlike the United States Supreme Court, French politicians seem to believe that they know better than the market what products and services should and shouldn't be bundled together. The EU has employed a similar tactic in trying to cleave Vista, Microsoft's pending OS release, from the company's media player.

The French Senate, which has yet to vote on the DRM legislation, has offered some concessions -- namely, a governmental agency that would review on an individual basis requests by Apple's competitors for access to its protocols. Apple is rightly skeptical of this overture; indeed, an apparatus of the vast French bureaucracy is no more likely to understand the importance of proprietary DRM than the French Parliament. (There also appears to be a schism between the government and Parliament on file sharing in general.)

In the end, Apple has had its hands full weathering the IP storm. But its vindication in the Apple Corps case and mounting pressure on French authorities have offered a much-needed umbrella.

Michael Rosen, TCS Daily's IP columnist, is an attorney in San Diego.

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6 Comments

The patent infringement suit
Courtesy of Creative Labs, Apple completes its iPod IP horror trifecta this month with a patent infringement suit. I'd love to see your informed opinion of that one!

It was, however, very interesting how you brought the Apple Corps, French DRM, and (I'm guessing) the Creative lawsuit together at the beginning of the article, and put the iPod, iTMS business in context buy comparing its size and growth to the Mac side of things. I forget exactly what the latest Gartner prediction for iTMS revenue is 3 years out, but it is staggering. Anyway, thanks for an interesting perspective.

Superiority...
The author talks about the "inherent superiority of the Mac" without defining what he means by "superiority".

The Mac is definitely easier to use than the PC, and has been for years. It is definitely a more stable platform. And it is definitely easier to learn. But superior? Not according to the all-knowing free market.

I have used both platforms for many years, but I have never purchased a Mac. Why? Because the Macintosh computer has always been much more expensive than an equivalent PC, much less expandable (at a reasonable price), and much less flexible. As an engineer, I know how to upgrade my computer, and only the PC allowed extensive upgrades at reasonable prices. The open format of the PC allowed competition in peripherals, which led to a much more diverse marketplace of support and expansion equipment, and more diverse software (at more reasonable prices).

So whether a Mac is superior or not pretty much depends on one's perspective. The PC won the marketplace battle because of the above listed benefits. Price is a big issue for most people, and the extra cost of a Mac, and the inherent loss of flexibility and features, just was not a good trade off for most people, especially engineers, who drove the initial computer market.

Apple has clearly learned this lesson, at least to some extent, as they have opented up their platform to some extent.

This issue reminds me of the debate between VHS and the betamax. The experts said that the beta was better, but almost everybody bought a VHS machine. Why? The primary reason, IMHO, was that VHS had longer record times much earlier, which allowed two-hour movies to be recorded. Beta could not record such movies. What good was a movie if the last 20 minutes or so could not be recorded? So which one was better? Well, the market decided that the VHS was better, even if the beta had a better picture quality.

The lesson is that one should let the market decide which is the better product. The market knows what it wants, and that does not always gibe with what the experts think is the better way to go.

-Bob

I've read
that the superior picture quality of the Betas, could only be seen on top of the line TV sets. Because the average TV set of the day had lower picture quality to begin with, most viewers could not see any quality difference between VHS and beta.

Beta Quality
I doubt that this is true in the general case. The typical VHS system has about half the resolution that a standard U.S. TV can handle, and thus any improvement up to twice the resolution would be apparent (note that a DVD player typically has better resolution than a standard TV can handle). Now it may be true that the difference is not apparent for some lower quality televisions, especially where the betamax signal was fed in to the TV using an RF modulator (i.e., through the antenna connetor), which would naturally degrade the signal (especially if fine-tuning was not properly set or there was interference from side channels). But in most cases, the difference should have been apparent on a standard TV of the era.

-Bob

-Bob

Sometimes inferior goods are preferred
It's not a given that a market participant will choose a superior product over an inferior one. Sometimes you don't want the purpose built restraint but rather the much cheaper chewing gum and bailing wire inferior alternative. It happens.

I'd suggest repricing Macintosh. In the US, I can get a Mac that's just fine for consumer use for $499. If you're just comparing name brands, that's pretty competitive.

The standard new TV of today, or the average TV in homes in 1980?
In 1980, only top end TV's had a way to connect to a VCR other than through the RF modulator.

Also, TV's generally lasted 10 years or more. So many TV's in 1980 had been built in the middle to early 70's. I had a few friends who still had black and whites back then.

With all analog circuitry, picture quality degraded as the sets got older.

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