EU Threatens Fines Against Apple for Staggered iTunes Prices

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1:05 pm CT April 3, 2007 - In a statement to BetaNews this afternoon, European Commission chief spokesperson Jonathan Todd said that both Apple and the record companies with which it has entered into agreements to sell music tracks in Europe, may be subject to fines as a result of alleged inequitable deals between them. Those deals, the European Commission claimed in a Statement of Objections issued to both Apple and major record companies today, allegedly charge varying prices per download for customers in different European member states.

"In any anti-trust case, the relevant ceiling on fines is 10% of the whole group's worldwide turnover," Todd told BetaNews. In this case, "the whole group" refers to everyone who is a party to the deal. Presumably, the ceiling applies to revenues arising specifically from the deal, though this has yet to be made clear.

"However," Todd added, "I have indicated clearly that the main focus of our case is the major record companies rather than Apple."

We asked Todd, doesn't the current state of European copyright law force a company such as Apple to be bound to the separate royalty collection rules of some independent states, despite the nationalization of music royalties in Europe last October?

"My understanding is that the fact that copyright is organised on a national basis in Europe is irrelevant," Todd responded, "in the sense that the major record companies in any case hold the rights for the vast majority of their repertoire for all European Economic Area countries (EU plus Liechtenstein, Iceland and Norway)."

In other words, it's the record companies who are claiming state-specific copyright, despite the EU's efforts to nationalize copyright on a continent-wide basis. Conceivably, if all European music copyrights applied to the nation as a whole, Apple would find it easier to open up a pan-European iTunes Music Store, as the company has stated it's wanted to do from the beginning. Instead, music industry executives may be forcing Apple to deal on a country-by-country basis due to the way they interpret their copyright holdings to apply.

In a press conference earlier today, Todd told reporters that perhaps Apple may be a victim of record company policy. "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," Reuters quotes Todd as saying. However, that fact may not exempt Apple from fines, due to the way current antitrust law in the EU is written - which, as Todd explained to us, refers solely and specifically to "the whole group" as the responsible party.

BetaNews' original story from this morning follows:


10:12 am CT April 3, 2007 - In a statement this morning, the European Commission confirmed it has threatened Apple with possible fines, in a formal Statement of Objections which alleges the company fails to charge equivalent prices for iTunes tracks for every European country where the iTunes Music Store does business.

Specifically, according to an EC statement, the objections point to "distribution agreements between Apple and major record companies contain territorial sales restrictions which violate Article 81 of the EC Treaty." Article 81 prohibits companies doing business in member countries from entering into contracts that fix prices to certain countries, against the EU's interests in a common market.

In a statement to Reuters this morning, EC spokesperson Jonathan Todd explained that the way Apple does business now, a customer can only purchase tracks on the Web site set up for his member state of residence. As a result, Todd said, customers "are therefore restricted in their choice of where to buy music, and consequently what music is available and at what price."

Just yesterday, in announcing its landmark DRM-free distribution deal with EMI Group, Apple CEO Steve Jobs reiterated iTunes' basic tier track price of 99 cents in the US, 99 eurocents for most European countries, and 79 pence in the UK. That fact alone points to Apple's first roadblock in addressing the EC's complaints: the UK retains its own currency. At current exchange rates, 79 pence is still a bit higher than 99 eurocents.

But beyond that hurdle lies a much higher mountain to cross: European copyright law, which today remains mired in cross-country disputes over whether member states should have the right to charge their own performance royalty fees, including for tracks that weren't even produced in their own country. While the EU formalized the creation of a Central Licensing Agreement for pan-European rights holders in 13 member states last October, it may yet take time for those states to march in lockstep, ceding their respective copyright authorities to a central body.

This issue is important because portions of iTunes' purchase price to European customers goes to performance rights holders and artists' rights holders throughout Europe. Determining who gets how much and when remains an issue of continued debate even years after iTunes started doing business in Europe.

Apple spokespersons told the press this morning that the company always had intentions of opening a pan-European iTunes Music Store, but the restrictive agreements with which music publishers are currently bound with member countries, may be among the legal restrictions preventing those publishers from permitting Apple to do so.

In other words, the music industry might actually want Apple to open a pan-European iTunes store, but the same lawmaking body that is ordering Apple to do so today may be preventing Apple from doing so in another regard.

Most daunting for Apple, on the day after what history may perceive as a milestone date for the company, is the threat of fines - and as was the case with the EC's Statement of Objections against Microsoft in late 2005, the methodology for determining how much Apple could be fined seems cloudy.

According to the EC's statement this morning, Apple will be given two months in which to present a formal defense of the claims against it. "Only after having heard the company's defence," the statement concluded, "can the Commission take a final decision, which may be accompanied by fines of up to ten per cent of a company's worldwide annual turnover."

The fuzziness of that final phrase may be daunting. For instance, the adjacency of "a company" and "worldwide" appears to indicate that the EC may attempt to fine Apple not just for iTunes sales within countries where non-equivalent prices are allegedly charged (for instance, Britain and Belgium) but also in the US. A Forrester Research report estimates that as many as 500 million iTunes tracks were sold worldwide just between February and September of last year.


Jonathan Todd's clarification this afternoon appeared to indicate that the EU's current ceiling on fines for Article 81 violations is limited to revenue from the specific business in question, although that's admittedly difficult to tell from a layperson's read of the actual article. In any event, any EU fines levied against Apple may be limited to iTunes business worldwide, and not Macintosh or AppleTV business as we earlier speculated.

However, Todd's clarification appears to open up the door for the EU to levy fines against the major record labels, which could conceivably apply to 10% of their worldwide revenue for music downloads through iTunes.

But how far back would these fines be retroactive? For an example, we may be able to point to the EC's threatened fines against Microsoft, which date back to the issuance of the initial Statement of Objections. If history applies to this case, then the clock on Apple's fines started ticking just this morning.

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