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The EC claims iTunes treats customers unfairly and that record labels are to blame

After a long series of investigations, the European Commission (EC) today decided to formally object to Apple and its iTunes business in European countries on anticompetitive practices. According to the EC, it has sent a Statement of Objections to Apple, indicating that the way Apple does business with its iTunes online store is in violations of EC treaty rules.  Additional complaints were sent to major record labels operating in the European Union.

The problem lies in the way that major record labels deal with the iTunes online store, allowing only limited access based on the location of the customer. Prices vary across locations and across borders, and customers in one zone may not be allowed to purchase music that's available in another zone. Worse yet, some customers end up paying higher prices simply because of their geographical location.

European Commission spokesman Jonathan Todd publically stated that the EC sees the agreement between record labels and Apple as a violation of trade treaties. "Our current view is that this is an arrangement which is imposed on Apple by the major record companies and we do not see a justification for it." An official statement from the EC indicated that customers were having their credit cards scanned for location information and if for example the customer was located in Belgium, they could only purchase songs designated to Belgium.

The report states, "Apple and major record companies contain territorial sales restrictions which violate Article 81 of the EC Treaty. iTunes verifies consumers' country of residence through their credit card details. For example, in order to buy a music download from the iTunes Belgian on-line store a consumer must use a credit card issued by a bank with an address in Belgium."

An important note in the EC's statement said that while this charge is an indication of treaty violations, it is not a charge of monopolistic practices.

"The Statement of Objections does not allege that Apple is in a dominant market position and is not about Apple's use of its proprietary Digital Rights Management (DRM) to control usage rights for downloads from the iTunes on-line store," concludes the report.

Before the EC sent its formal charge to Apple, the life-style computer company already faced a number of allegations about the iTunes store. Earlier this year, a number of agencies in several European countries joined forces to threaten legal action towards Apple if it didn't change the way the iTunes store operated. Groups in Denmark, Germany, France, Norway and Sweden complained that Apple's DRM format is too restrictive and did not allow users to play music on players of their choice.

In February of this year, Apple CEO Steve Jobs said that despite the restrictions placed on songs downloaded from the iTunes store, he would rather see Digital Rights Management (DRM) completely abolished. "Through the end of 2006, customers purchased a total of 90 million iPods and 2 billion songs from the iTunes store. On average, that’s 22 songs purchased from the iTunes store for each iPod ever sold,” Jobs said. While it's difficult to ignore that iTunes does effect sales of iPods, consumers have been against DRM-enabled music from the get-go. Even Microsoft chairman Bill Gates took a stab at DRM late last year.

With the EC's latest charge on Apple, it will be interesting to see how things shape up between Apple and major record labels. While the RIAA is still going after college students and other end users, the Digital Millennium Copyright Act (DMCA) may be going through some changes thanks to updated a new FAIR USE act, which calls for reduced restrictions for both consumers and hardware developers. The dynamics between Apple, record labels and government agencies is no doubt a complex one. Despite Apple's troubles, the iTunes business is still a roaring success.


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RE: Their what location?
By Yaponvezos on 4/4/2007 9:22:41 PM , Rating: 2
Indeed the answer to all of the above is yes. Trading of goods within the EU is open and free in the sense that every European can buy anything, from any EU territory at the price set in that particular territory/store etc.

The way things are now is like having a separate online store for each of the american states while the customer can only buy from the store that is the state his credit card was issued. It's simply ridiculous as the Union's main function has always been the formation of a broader common european market.


RE: Their what location?
By Ringold on 4/4/2007 10:46:56 PM , Rating: 2
I think people need to step back and realize the record labels wouldn't turn away markets for no reason; they exist to make money, and if they think that selling their tunes to Greece would be profitable, then there is no reason why they'd arbitrarily ask Apple not to offer them there.

Given that, they ought to be given a chance to say what it is. For their sake, I hope they do, just to make the efficiency point known. If I see the EC require them to make the sales, and I happen to remember, I'll try to check the quarterly report of one of the labels that are publically traded and see if they lose money/take a hit with margin compression.


RE: Their what location?
By Yaponvezos on 4/4/2007 11:04:08 PM , Rating: 2
You won't have too. These regulations have been in place for years now and any company entering the european market knows it. The record labels have no objection when it comes to sales through physical retail stores so why would they when it comes to online stores? After all, online sales account for only a fraction of total sales so if there was an impact that would have anyone concerned it would have already been obvious through the physical retail channels.

Either way, wholesale prices don't differ much from country to country since international trade is organized in a way so that anyone can buy from anywhere within the EU. Even big chains do it, legally too. So Fnac stores in Spain have the right to buy a certain product that they want to offer through any wholesaler across Europe, going of course for the one with the lowest price.

This system has more or less nullified significant wholesale price fluctuations as everyone wants to be competitive not only within a country but withing the Union. Assuming of course that we are referring to products that interest international customers.

One more clarification. We are talking about established EU law, law concerning trade policy that had to be unanimously accepted by member state governments. So there is no legal precedent to be made. And the European Commission is in no way analogous to the Supreme Court as it has absolutely no judiciary functions/responsibilities.


RE: Their what location?
By geddarkstorm on 4/6/2007 6:13:02 PM , Rating: 2
Ah, then that's the answer to that then. If every single store is required to sell to anyone anywhere in the Union (not just those who actually walk into the store but those that call it up) at their list price, regardless of taxes in other countries or such rules (as the EU superceeds them or has consolidated them?) then Apple is clearly in the wrong. Sounds like a strange practice though. Inbetween states in the US, things that aren't internet priced (which is differently priced from instore prices for the same company!) aren't going to be sold to someone out of state who calls them up from that out of state location and isn't going to come in state, physically to the store, to pick up the item. They'd either charge alot of shipping ontop of their price (a cute way to charge more money that is totally unregulated and doesn't have to be "honest") or just flat out deny it. Not to mention, different state laws on sales taxes would really really be a pain in the butt (it is enough already for internet sales).


RE: Their what location?
By Oregonian2 on 4/5/2007 5:46:45 PM , Rating: 2
quote:
The way things are now is like having a separate online store for each of the american states while the customer can only buy from the store that is the state his credit card was issued. It's simply ridiculous as the Union's main function has always been the formation of a broader common european market.


This would be allowed in the U.S., might be stupid, but it'd be allowed. Not only that, but if one has a single web store, you can be charged a different amount of money depending upon where the buyer is (not even accounting for shipping), despite the webstore being a single one (different taxes).

There is another difference too. The US's states are more like regions within a single EU country. My impression of the EU isn't that it's a single country (single representative in the U.N.) with one all-powerful central government that controls everything politically and economically and routinely overturns individual state laws as a regular day to day thing.

Also there is this thing about Credit card issuing, why does that keep coming up? The "topic" is where the buyer is located physically, it has nothing to do with where the credit card came from, where it was issued, what country issued it, what brand of card it is, or what language the writing of the card is. Or even if the buyer has one.

But thanks for your answer that ALL stores no matter how small or big or how it's structured, MUST sell internationally in the EU.

In the U.S. the vast vast majority of retail stores ONLY sell locally, which is to say they ONLY sell to customers who are physically in the same state they are (except for the possible very few restaurants that are located right on top of a state border and different sections are in different states, etc).


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