Apple vulnerable in iTunes antitrust probe

Market dominance in music downloads gives DOJ more to work with, says antitrust expert

Federal antitrust regulators may be able to build a case against Apple over its iTunes business because the company has a dominant share of the U.S. music download market, an antitrust lawyer said today.

The Department of Justice is reportedly in the early stages of an investigation of Apple's business practices, in part because of a complaint that the company pressured music labels to pull support of Amazon's "MP3 Daily Deal," a promotion in which the online retailer received exclusive access to new tracks.

Apple has an estimated 70% share of the U.S. retail digital music download market, significantly larger than Amazon and Wal-Mart, which each account for 12% of all sales.

And the size of Apple's share matters to the government, said Hillard Sterling, an antitrust attorney at Chicago-based law firm Freeborn & Peters LLP.

"This has much stronger promise than the mobile device case because Apple's market share in digital music is much more attractive to government regulators," said Sterling, referring to reports earlier this month that officials at the DOJ and the Federal Trade Commission (FTC) are also looking into Apple's ban of third-party development tools for creating iPhone software.

"The DOJ seems to be sniffing around for a stronger foundation for an antitrust case," Sterling said. "And 70% is sufficient market share to raise the specter of a monopoly. It's a strong indicator to the government."

However, there's noting unlawful about having a monopoly, Sterling continued. What may be illegal is how a monopolist uses or abuses that position of strength.

"The next, more difficult step for the government would be to show an abuse of that power," said Sterling. "[The DOJ] has to show that a monopolist's conduct is truly anti-competitive. The big question is whether consumers are facing fewer choices or higher prices because of Apple's behavior."

It's no coincidence that reports of two DOJ probes of Apple have surfaced so closely together, Sterling said. "The reality is that there isn't a lot of antitrust for the government to seize on right now, but the department wants to show that this administration is tougher and more activist in the antitrust arena than the previous," he said.

And like everyone, the DOJ wants to find a battle it believes it has a good shot at winning. "Few companies have the dominant share and control of their respective markets like Apple has of music," Sterling argued. "They want to shoot the biggest fish in the smallest barrel."

But just because Apple's in the DOJ's sights doesn't mean it will go down. If federal regulators do push their inquiry to a formal investigation, Apple could make concessions. "There's plenty of room for Apple to negotiate a resolution long before this reaches a courtroom," said Sterling. "These types of disputes usually end with companies agreeing to modify their business practices."

If Apple stuck it out, it could face not just a flood of piggyback lawsuits, but a very long, very expensive legal war with the government. "Apple is one of the few companies that could take on this battle, but it would be incredibly expensive and distracting," Sterling said.

Microsoft's antitrust case, for example, began in 1991 with an inquiry by the FTC, didn't go to trial until 1998, and was only settled in 2004 when a U.S. appeals court approved the deal the company had struck with the federal and several state governments. Microsoft remains under judicial oversight.

"Apple would clearly prefer not to saddle itself with that if a deal was palatable," said Sterling.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld . Follow Gregg on Twitter at @gkeizer , or subscribe to Gregg's RSS feed . His e-mail address is gkeizer@ix.netcom.com .

Read more about gov't legislation/regulation in Computerworld's Gov't Legislation/Regulation Topic Center.

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Gregg Keizer

Gregg Keizer

Computerworld (US)
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