Storming the iTunes Music Store

France has passed a law that requires suppliers of content (most notably Apple’s iTunes Music Store) to provide information that is essential for ‘interoperability.’ Currently, purchases from Apple will only play on iPods, PCs and, of course, Macs, but not on other MP3 players and systems. The intent of the law is to require Apple to provide a means of making their downloads playable on alternative systems.

I have noted before that, in an ideal world, this might not be a bad thing for Apple. It will only encourage more sales from its store and may not make such a difference for iPod sales (after all, most music on iPods does not come from Apple, it is from peoples’ own music collections).

Of course, the world is not ideal. It seems reasonable to suppose that Apple’s agreement with music publishers is contingent upon downloads being in their DRM format. Moreover, it is also likely that Apple would be contractually prevented from providing ‘work arounds’ as the French law would require. So what will happen?

There are several possibilities:

1. Apple exits France.

Notice that this won’t happen immediately. Someone has to make a claim against Apple. They have to then demonstrate the ‘interoperability’ is possible but it is unclear whether this can be modified for piracy concerns.

Moreover, even if that is done, Apple could argue that its downloads are already interoperable. Why? You can burn a CD from iTunes in the original CD format. Then you can load it back to the computer in MP3 format; something playable on most systems.

2. Apple partially exits France

Apple could modify its iTunes Music Store in France to supply content that does not require DRM (e.g., podcasts and independent music publishing). This would leave it with a presence as well as sending on on-going message that French customers are being disadvantaged by the French government.

This is not usually Apple’s style but then again, they did launch the Australian iTunes Store without Sony initially. Australians knew where the blame lay there.

3. Apple finds a way to provide interoperability.

If it is potentially in Apple’s interest to open up the system, it could provide interoperability. Imagine what would happen if it found a way to do this that was proprietary. Then its music store would have a considerable advantage over others and it would retain its dominance there. Thus, there are big incentives to innovate on that dimensions.

So, in summary, given this, the immediate exit notion seems very unlikely to me. It also seems that this will not have long-lasting effects on innovation. It just sends a signal to the music industry: worry about DRM but also worry about providing competition. We want to find out if we can have our brioche and eat it too.

Opening up iTunes

France are considering opening up iTunes to other devices. At present iTunes downloads are in Apple’s proprietary format. Originally this was important in securing appropriate digital rights management to effectively establish the legal downloads market. Nowadays that isn’t an issue as other formats provide the same thing.

The problem is that iPods only play Apple’s format or the open mp3 standard. They do not play standards that are supported, for instance, by Microsoft. Other players do this but cannot play using Apple’s standard.

The French law will make it legal to utilise software to convert songs from one format to another. This would allow users to purchase songs from iTunes and play them on devices other than iPods or with programs other than iTunes. Thus, the link between Apple’s dominant share of music purchases and players would be broken.

There are suggestions that Apple will shut down its iTunes store in France in response to this. It may have to if its agreements with copyright holders cannot be amended. But if it had a choice would this really harm Apple. After all, it would make the iTunes music store more attractive and there are plenty of substitutes for its iPod anyway.

Of course, the alternative to the French approach would be for Apple to open up iPod to alternative formats. This would allow consumers to purchase music from alternative sites. This would also likely make it easier for competition to trancend national boundaries — something it isn’t doing today (see this article for a discussion). From where I sit, that is where the big gains to competition lie.

Toll was slow to put its cards on the ACCC’s table

FYI, I have an opinion piece in The Age today on the Toll-Patrick merger. Essentially, what was posted here on Sunday.

A Toll on the Merger System

On Saturday, the ACCC ended its upcoming legal battle with Toll by accepting its merger proposal and undertakings. Actually, that is probably the wrong way to put it. Let me try again. A week or so ago, Toll ended its upcoming legal battle with the ACCC but putting forward undertakings that assured consumers would be protected if it acquired Patrick.

The way we view the problem here is important. On the one hand, some businesses may argue that the months of negotiations, legal proceedings and delay are a system of a merger system that takes too long and isn’t working. If they were going to agree to the merger, the ACCC surely could have done so sooner.

But that isn’t what happened. What happened was that Toll put forward a merger proposal that was going to harm consumers. For instance, the merger would give it (almost) full control over East-West rail freight and likely stifle potential for competition to emerge there by giving it a healthy chunk of the freight forwarding business too. For months, it proposed undertakings. Each one was a promise not to discriminate and favour its own businesses but each one did not get at the core of the problem: its control over key physical assets going forward.

Finally, with legal action impending, Toll put forward a structural change. It would not acquire Patrick’s share at all but divest it to a third party – outside of the industry. No more horizontal issue (there would be no increase in concentration) and no vertical one (the new owner would not be a freight forwarder). At last, the ACCC had a merger proposal that offered real insurance: consumers would have a chance of competition going forward rather than it being foreclosed.

The end point illustrates how the system is supposed to work. Firms come to the ACCC with merger suggestions but will only approve those ones that do not harm consumers. The remainder benefits the businesses involved and should be permitted.

But sometimes, there are benefits to the business and harm to consumers. In these cases, the ACCC raises concerns and ultimately business, using imagination that only industry insiders possess, come up with changes to the proposal – divestitures or restrictions on behaviour – that might cost them some profits but still leave enough left over to make the whole deal worthwhile. This is where we ended up with Toll.

But business is right. It shouldn’t have taken this long. Three months ago, the concerns of the ACCC were clear. And three months ago, the path to allay those concerns was obvious. But it took most of that time for Toll to put an acceptable proposal forward. That is where the fault, the delay and the market uncertainty all lie.

Toll will be paying the ACCC’s legal costs. Just as well. The costs caused by their own delay shouldn’t be borne by tax payers.

[DISCLOSURE: I assisted the ACCC in its economic analysis of the Toll-Patrick proposal. The views expressed here, however, are solely my own and should not be construed as representing those of the ACCC.]

[BACKGROUND: I wrote an article advocating the ACCC (and the Courts) judging mergers in the interests of consumers. It was published in the Competition and Consumer Law Journal last month. An op ed piece in The Age last year summarised the argument.]

Patent does not equal market power (for tying)

The US Supreme Court delivered its judgment in Illinois Tool Works, Inc v. Independent Ink, Inc. That case was over a tying matter in industrial ink printers but ended up in the Supreme Court over the presumption that having a patent equated to a finding of market power (in this case, for Illinois Tool Works).

The Supreme Court decided that for tying cases, this presumption no longer holds and the plaintiff will have to prove market power. Shouldn’t be too difficult in this one where the plaintiff has a 90% market share with lots of entry barriers.

Crossing the Media

This week’s New Matilda contains an article I wrote on potential changes to cross media ownership and what this might mean for media bias. I argue that while there may be a biased media, allowing cross media ownership is unlikely to change that one way or the other. To reduce bias, it is much more important to have diversity within a media channel than across them.

You can access the article (without my picture), here.

Three Words: Structure, structure, structure

Today Telstra is indicated how it will split (e.g., Australian Financial Review –). Need I remind the world that operational separation is just another form of regulation and the best thing would be a real change in structure.

Indeed, last year in New Matilda (click here) I argued that not only would this increase competition and overall welfare (lest that should be enough) but also that a split of Telstra would actually get the Federal government more money!

Now to work out why a broad win-win doesn’t occur, requires us to locate some people who would lose out. The search is quite difficult and I’ll see what I can do later.