French law challenges iTunes
French lower house of parliament approves deal that would require Apple to open its FairPlay digital rights management (DRM) technology; passage by Senate could cause iTunes to bid Gaul adieu.
Will Apple take its iTunes ball and go home?
That's the question on the minds of many digital music insiders today, as France's lower house of parliament passed a piece of legislation that will require Apple to open up its proprietary technology that at least in part has helped it maintain its stranglehold on the digital music market worldwide.
"These clauses, which we hope will be taken up by other countries, notably at the European level, should prevent the emergence of a monopoly in the supply of online culture," Richard Cazenave and Bernard Carayon, National Assembly deputies from the ruling UMP party, said in a statement today.
The bill would require that iTunes provide the software codes for its digital rights management (DRM) technology that applies usage restrictions to downloaded music. Opening up the codes would allow the conversion from one format to another. The bill also introduces new penalties for music pirates and is directed at proprietary DRM users Microsoft and Sony.
It would still need to be approved by the French Senate, a process expected to begin in May, before it becomes law.
But if it is, Apple would need to decide whether to comply by opening up its FairPlay DRM technology or pulling out of the French market entirely to avoid having to comply. The company declined to comment on the French vote today.
If Apple complies, it would begin to remove what is widely regarded as the single greatest barrier to expanding the digital music market--the lack of interoperability between Apple's iPod/iTunes juggernaut and the rest, meaning that iTunes users can't transfer music from it to a non-iPod player.
But in making that decision, Apple must decide if the French legislation could be duplicated elsewhere in Europe and even in the US.
"Apple might be reluctant to leave the market if it sees that this kind of legislation could be passed elsewhere," said Phil Leigh, a longtime analyst of the digital music space and president of Inside Digital Media.
"This kind of thing will probably gain momentum, and it could make its way to the US," he continued. "The forces that are behind this in France are the same forces that have an interest here in the US. But it won't happen in the US this year."
In a research note issued today, Piper Jaffray analyst Gene Munster predicted Apple would bail on the French market.
"We believe Apple is more likely to drop out of the French market than open up its FairPlay DRM to allow iTunes to play on competing MP3 players," he wrote. "While this sounds like a drastic move, we believe it would not materially impact business."
He estimated that approximately 20 percent of iPod and iTunes sales occur outside of the US, and that the French market by itself represents less than 2 percent of the Apple music business.
The French government says the new law is designed to boost the legal digital music market and adapt the country's copyright rules to the rapidly changing online content market. It was adopted by the National Assembly on a 286-193 vote.
"Any interested party can ask the court...to get a supplier [of content]...to provide information that is essential for 'interoperability,'" the law states, so that content can be read by any device.
Leigh said that if Apple chooses to comply with the ruling, it will end up making more money by allowing the digital music market to expand and prevent a bifurcation of the market between Apple's system and Microsoft's PlaysForSure DRM, which is used by most of the other major download services, including Rhapsody, Napster, and Yahoo Music Unlimited.
He also noted that given the number of music-ready cell phones to be sold this year--estimates range from 150 million to 200 million--Apple could reap a windfall on licensing royalties for FairPlay.
"That's a lot of money straight to the bottom line for Apple," he said.
