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Wednesday, July 26, 2006

iRegulation

By ELISABETH EAVES

PARIS -- French efforts to force Apple to share its iPod software secrets ended with the passage of a loophole-riddled law last month, giving the California company reason for cautious optimism after months of legislative debate. That doesn't mean, though, that the heat is off Apple in Europe. Even as a range of competitors nip at iPod's heels, other governments on the Continent are considering jumping in headlong to regulate the digital music market.

At issue in France was the proprietary software used by online music stores -- Apple's iTunes being by far the largest -- to encrypt files so that they can be played on some devices but not others. Music purchased on iTunes can be played only on the company's iPod players, and music bought on other sites, mostly encrypted using a Microsoft-owned format, can be played only on non-iPods. This can be annoying for consumers. If, for example, you want to switch from an iPod to another brand's player, you would have to either re-purchase songs bought on iTunes, or use a time-consuming workaround to copy the music onto the new gadget. Here's where the European regulators come into the picture.

The recording industry, consumer groups and zealots opposed to digital rights management in any form have lobbied governments across Europe to force interoperability, and they're making political inroads. Britain's parliament recently held hearings in which the head of the country's recording industry trade association, BPI, said that Apple's dominance of the market was "not particularly healthy" and called on the company to make iTunes-purchased music operable on all players. The recording industry doesn't want to do away with digital rights management, which keeps people buying rather than sharing. But BPI resents Apple's hefty market share, which the company uses to negotiate song prices lower than the labels would like.

Meanwhile in Norway and Sweden, government consumer protection ombudsmen have threatened to impose fines on Apple if it does not make interoperability possible. Legislatures in Poland and Switzerland will likely take up the subject this year when they review copyright laws. The new French law, which awaits Jacques Chirac's signature, does demand interoperability, but with a major exception: If iTunes can get the OK from a work's copyright owners, it can keep encryption in place. Many artists and labels are likely to give permission, because more protection can mean more sales and iTunes is such a big vendor. So in a classic case of pointless government meddling, the law may amount to a massive increase in paperwork for companies with no discernible effect on the consumer.

In any case, calls for French-style legal "remedies" miss an important point, which is that the bugs still involved in digital music buying -- and the fast-evolving world of digital video -- are ones that the market is likely to take care of best on its own.

To start with, the limited use of songs bought on iTunes is no secret. If customers don't like it, they can simply steer clear. Apple's detractors will quickly counter that the iTunes-iPod bond has already skewed the playing field in ways that need redress. The iPod is in massive use, accounting for more than 70% of the global market for digital music players. And the more songs you buy on iTunes, the more securely you are locked into terminal iPod-ownership, or so the theory goes, putting Apple on an upward spiral to total market control.

But no one is forced into buying an iPod, and even an iPod owner doesn't have to buy music on iTunes. Much of the music played on iPods today was ripped from CDs bought the old-fashioned way, or stolen through file-sharing. And while most online music stores do encrypt their files, a few do not: Emusic, while it doesn't have a catalog the size of iTunes, sells songs in the unprotected MP3 format, playable on any device.

The point isn't that the iPod or iTunes are perfect products; clearly they're not. But neither one has a monopoly. And before paternalistic authorities swoop in to save the consumer from himself, they would do well to remember just how short-lived market dominance can be in the fast-moving world of personal technology.

There are other players on the market that might make Steve Jobs sweat. The chunky black Gremlin, launched last month by MusicGremlin, is the first player that allows users to download songs wirelessly. South Korea's Reigncom makes the Clix and the iRiver, which, like the newest iPods, play video as well as sound. (Apple won't say what the "i" in iPod stands for, but apparently it's not trademarked.) Singapore's Creative Technologies, which makes the Zen player, is embroiled in a legal battle with Apple in the U.S. over patent rights. (Both companies have filed suits with the U.S. International Trade Commission asking to halt imports of the other's player; the companies have also sued each other.)

Those are only some of the more popular handhelds; Sony, Samsung, Gateway and Toshiba are all in the market as well, and Microsoft has just confirmed that it will launch its Zune player this year. And that's just the hardware. Urge, Rhapsody and Napster are a few of the many sites selling songs online.

Apple is on top now, but in the end its exclusivity could do it in. Remember the Betamax? Sony's home video recorder had a two-year market lead with virtually no competition before being wiped out by the VHS made by JVC -- which in turn, a decade or so later, was made obsolete by the DVD. Among other smart moves in its time, JVC licensed multiple manufacturers to make VHS machines. And goodness knows Windows didn't become ubiquitous because it is the most user-friendly of operating systems. Rather, Microsoft licensed it far and wide. Today it's doing the same with its Windows Media Player, used by many of iTunes' competitors.

This is a churning market, with new devices, services, technologies and content added to the mix day by day. Apple may not be on top forever, and consumers are capable of deciding what they want without the long arm of the law. The "help" being offered by European governments is the kind we can all do without.

Ms. Eaves is a Robert L. Bartley fellow at the Journal's editorial page.

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