Posted by: bklunk | April 4, 2007

Attention, iPod Listeners

T.R. Reid of the Washington Post says that the European Union is a superpower with at least as much clout in international political economy as the U.S. I suppose Apple agrees.

Antitrust Review » Record Labels & Apple Face EU Antitrust SO

The European Commission today confirmed its investigation into alleged market divisions in the on-line music industry. The Statement of Objections—a formal document comparable to a complaint in the Commission’s proceedings—was sent to major record companies and Apple. Here is the press release:

The European Commission can confirm that it has sent a Statement of Objections to major record companies and Apple in relation to agreements between each record company and Apple that restrict music sales: consumers can only buy music from the iTunes’ on-line store in their country of residence. Consumers are thus restricted in their choice of where to buy music, and consequently what music is available, and at what price. The Commission alleges in the Statement of Objections that these agreements violate the EC Treaty’s rules prohibiting restrictive business practices (Article 81).

Apple operates a series of iTunes on-line stores in the European Economic Area (EEA) which sell music downloads. The Statement of Objections alleges that distribution agreements between 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.

Apple acts as the distributor for the record companies; it would seem to me therefore that agreements between the record companies and Apple, under which Apple may only sell songs within territorial restrictions, is a vertical restraint, limiting interbrand competition. Vertical restraints, which are almost always permissible under the rule of reason in the U.S. (unless, for the moment at least, they concern minimum resale-price maintenance), tend to be viewed more restrictively under EU law. Such restraints would come under Regulation 1983/83 (and specifically Art. 3(c)?), with the odd result that the same distributor, Apple, covers the territories of several member states and the restrictions of the iTunes stores are entirely internal to the distribution by Apple. That is, Apple is not restricted from selling to from someone in France, it just can’t do so through the Belgian iTunes music store. I am curious to what extent the offerings and pricing between the Belgian and French iTunes music stores actually differ. (Do you know? Tell us.)

The Wall Street Journal ($) reported this morning. ABC also had the story, including Apple’s reaction:

Apple spokesman Steve Dowling said Monday the company wanted to operate a single store for all of Europe, but music labels and publishers said there were limits to the rights that could they could grant to Apple.

“We don’t believe Apple did anything to violate EU law,” he said. “We will continue to work with the EU to resolve this matter.”

The cost of buying a single song across the 27-nation bloc varies among the available iTunes stores in EU nations.

For example, downloading a single in Britain costs $1.56, in Denmark $1.44, while in countries using the euro such as Germany and Belgium, a single costs $1.32.

Oh, and in case you were wondering. The EU also said:

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.

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  1. Antitrust Review » Record Labels & Apple Face EU Antitrust

    This seems a little out of proportion to me; either Apple is reacting too strongly or the EU is getting bent out of shape due to a relatively small disparity of a few cents; personally I think its both. Yes there is a concern with free trade between EU countries and offering of one product at the same cost throughout, but it seems like there is an awful lot of concern on their part for something relatively meaningless, after all I am sure a can of Coca-cola does not carry the same price tag from one end of the EU to the other. I may be comparing apples to oranges, and I will admit I do not know enough about the EU to truly understand the problem, but it does seem like an over reaction. From the EU perspective I can understand the desire to offer products and services at a uniform price but it only makes sense that certain products cost more in certain regions; in fact it makes great economic sense to charge different prices to different locations. The general logic is that a company needs to cover overhead costs, if you’re buying French wine in France it should be at a lower cost due to a lack of fees, transportation, packaging, and etcetera. That same bottle however must cost more in another location to cover the costs mentioned prior. I am not sure how this all fits in with digital media, which is conceivably accessible to everyone equally, but maybe that is not the case? Maybe some satellites orbiting around certain countries cost more to maintain? Who knows, but overall the whole issue seems like an overreaction to what any economist would say just makes sense.

  2. It sounds to me like Apple is getting blamed for something that is out of their control. They were told by the music labels they could not set up one store for all of Europe because of limits to the rights of the songs. Apple complied with the labels and is now getting hit by the EU because of the price variations in different countries. Call me crazy, but it seems to me that Apple just can’t win. I suppose they could have separate stores for each country but still charge all of the same prices, yet it seems like by that point they have lost a lot of their autonomy as a service provider. It would make the most sense if Apple, music label reps, and EU reps sat down and hammered out an agreement so Apple could have one store that would work across the EU, would accept the Euro, and would have standard pricing regardless of location. Maybe in a perfect world…..

  3. This is a very interesting post.
    Apple almost seems that it is monopolizing the internet download industry because they cut deals with all of the major record labels so that they can sell their music online and make a profit. But it does seem like a monopoly because they are the only people doing it on this grand scheme. If other wanted to sell their music it would be very difficult to do so, since Apple already has contracts with the labels, and I don’t think that the labels would sell out to a smaller competitor. But it was a good plan for Apple because they were the first ones to do this, so I can see that there can be an argument for Apple because they took the initiative and did it. If any other company made deals with the Record labels first, Apple would probably be raising the argument that they are monopolizing the industry and there is no room for competition because they were beaten to it. It is going to be very interesting to see how this whole thing plays out.

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