Does Apple Have a Monopoly?

Here’s a question that’s been on my mind for some time now – will Apple ever respond to charges that it has a monopoly in the media player market and start acting responsibly, or will it do the same as Microsoft and hold out until the company finds itself in the midst of a federal involvement?

On December 31st a lawsuit was filed which hit Apple on several fronts. At first blush the suit looks like any other frivolous lawsuit filed by someone trying to make a name for themselves. But on closer inspection this suit actually homes in on a few chinks in Apple’s armor.

The lawsuit, filed by Stacie Somers, a resident of San Diego, claims that Apple’s domination of the market for online music, online video, and digital music players constitutes a violation of the Sherman Antitrust Act.

The lawsuit also questions why the iPod doesn’t support WMA audio files when most other players on the market do. It claims that the SigmalTel STMP3550 chip that’s used in the iPod shuffle is itself capable of supporting WMA but that this feature is deliberately disabled by Apple. According to SigmaTel’s own documentation, the 3550 is capable of handling both MP3 and WMA and is upgradable to other formats. It would seem that it’s also downgradable where needed.

Also, the lawsuit questions the huge price difference between the 1GB and 4GB iPod nano and claims that the $5.52 price difference that the memory modules cost translates into a whopping $100 price difference between the two iPods. Since it can be hard to put a price on individual components this figure is open to debate, but for comparison, the cost difference for the flash memory modules in a 4GB and 8GB iPod nano was estimated at $24 by iSuppli, back when the price difference between the models was $100. I’m not sure where the $5.52 figure comes from but it’s clear that Apple charges a premium for higher capacities (though Apple isn’t alone here – for example, Microsoft charges a premium for the higher capacity Zune players).

Finally, the lawsuit questions Apple’s claims that music labels are unwilling to allow tracks to be sold free of DRM, given that an outlet such as Amazon has been able to strike DRM-free deals for its customers.

These issues – WMA support, the price difference between models of different capacity, and why most iTunes tracks still come wrapped in DRM – pale in comparison to the claims that the iPod/iTunes ecosystem that Apple has generated is monopolistic and violates the Sherman Antitrust Act. This one is the biggie and has to be the claim that Apple is most keen to distance itself from. Any form of antitrust court case would put Apple under the microscope and – for a company that likes to play its cards close to its chest – that kind of attention would be unwelcome.

According to the lawsuit, Apple controls about 70% of the flash-based media player market and 90% of the hard drive-based market, and iTunes is the source for 83% of all legally downloaded music. Are these numbers grounded in reality or just pulled out of the air?

Well, you can find sources to confirm that all three figures are roughly in the ballpark. Back in 2004 an NPD Group report claimed that the iPod accounted for 92.1% of the hard drive media player market while in 2006 a WR Hambrecht report backed up the iTunes market share figure. The sales numbers also speak volumes – the iTunes download store opened in April 2003, and by March 2005 over 300 million songs had been sold. This ballooned to a billion by February 2006, 2.5 billion by April 2007, 3 billion by July 2007 and 4 billion in January 2007.

Assuming that these figures are in the right ballpark, that’s a whole lotta media players out there with the Apple logo on them. And these players are stuffed with music bought fron iTunes.

But the problem isn’t just down to the numbers, but in the way that Apple locks users into buying more Apple products. At the core of this is the iTunes software that every iPod owner needs to install in order to make use of their iPod.

So, you’ve bought the iPod and installed the software. Then perhaps you begin ripping a few CDs or importing your content into iTunes. At that point the lock-in begins. While those users with an understanding of iTunes and audio formats know that iTunes doesn’t totally lock you into using iPods forever more, for the average user, getting the tracks out of iTunes and into a form that another player can play is near to impossible. Once a consumer has made iTunes the hub for their digital media, the chances of them breaking free of Apple’s grip becomes very small.

But does commanding the market share that Apple does constitute a monopoly? Does selling 20 million iPods a month constitute a monopoly? What about selling a billion iTunes songs in 6 months? Well, in the words of Homer Simpson, that’s for the courts to decide, but these numbers are huge.

I think that if Apple is to avoid trouble, the company first needs to acknowledge that it commands a huge market share, and that with that kind of market share comes responsibility. It also needs to take a very careful look at the iPod/iTunes ecosystem and how that affects customers. Two things that Apple could do quite easily would be to first license their FairPlay DRM scheme to other music providers and hardware manufacturers. This would mean that DRM-encumbered tracks bought through iTunes could be played on other devices, and that other outlets could sell tracks that are DRMed for the iPod (although with DRM now losing traction, this is unlikely to be popular).

The second move that Apple could make would be to open up iTunes to allow developers to create plug-ins for other media devices. While I wouldn’t recommend iTunes as a media repository to my worst enemy, it would give people caught up in the Apple ecosystem a way out if they choose a non-Apple branded player. All this would cost Apple time and money, but then so would fighting a lawsuit.

Now all we need is a credible alternative to the iPod.