The first Apple iTunes Music Store opened in
April 2003 and only serviced the United States,
but was followed in June 2004 by three European
stores, one each for France, Germany, and the United
Kingdom. The iTunes Music Store catalogue has grown
from 200,000 songs to one with over a million, primarily
because music publishers have learned to trust the
safeguards Apple has created to prevent widespread
copying of music bought from the iTunes Music Store,
protecting their copyright and expanding their sources
of income. According to Apple, the iTunes Music
Store commands a 70%
share of the legal music download
market.
This places it far ahead of similar services
offered by companies such as Real and Napster. No
small part of Apple’s success with the iTunes
Music Store has been its integration with the easy
to use iTunes music playing software and the best-selling
iPod MP3 player, by far the best device of its type
on the market.

But there is a fly in the ointment: the three
European iTunes Music Stores don’t all sell
the same songs at the same price. At the French
and German stores, each song costs €0.99,
while the British music store sells the same songs
for £0.79. Okay, the numbers looks the same,
but the units are different, and there’s the
rub: in American terms, the French and German price
is $1.19, while the British price is $1.40. Why
is this a big deal? Because Apple have used technology
that locks British purchasers from using the French
and German stores, something that contravenes a
basic principle of a common European market.

The European Common Market

Most Americans have no idea what the European
Union is and still largely think of Europe as a
continent made up of lots of little countries. Put
at its simplest level, the European Union binds
together the member nations into something approaching
a single, federal state. One of the core attributes
of the European Union is that it should behave as
a single market as far as its citizens are concerned.
This ‘common market’ evolved during
the late 1960s and has steadily become more accessible
with the introduction of cheaper transportation,
better communications, electronic banking, and above
all the Internet.

Naturally this doesn’t matter for many things,
like grocery shopping, which are usually done near
home, wherever that might be. But for things that
are expensive in one place, the savings made by
buying outside your immediate area can easily offset
the expense of a trip to another European Member
state. Where you live doesn’t matter, and
nor does where you bank account is. If you have
a credit card, you can use it to make purchases
in Pounds or Euros without any fuss, and it is easy
enough to make a banker’s draught in whatever
currency you want if you prefer to pay that way.

The classic example of this is cars, which can
vary by thousands of dollars from one country to
the next. Volkswagen has
recently been fined €90 million for preventing
Germans and Austrians from buying cars from countries
like Italy where prices are lower. The result of
legal action like this has been a persistent convergence
in car prices, especially in the ‘Euro Zone’,
that part of the European Union that uses the Euro.
It is now common for people to buy cars, wine, food,
even homes, in one country even if they live or
work in another.

The UK iTunes Music Store

This brings us to the UK iTunes Music Store, which
charges significantly more than the other two European
Union iTunes Music Stores. Apple justify this by
saying that the “underlying economic model
in each country has an impact on how we price our
track downloads ” according to the BBC.
What this means is that Apple charges what they
think the market will bear.

The question is whether Apple is allowed to do
this. European Union regulations are hideously complex,
but the Consumers Association, the leading British
consumers’ pressure group, believe that Apple
is breaking European Union law here. They say that
Apple needs
to equalize prices between the three
European iTunes Music Stores.
The basic gist of their argument is that while Apple
are free to charge what they want for their songs
in the UK, under European Union law they cannot
prevent British shoppers from going to France or
Germany to buy those songs if they want to. But
that is exactly what they have done. Apple has created
a system that prevents British consumers from purchasing
songs from the French and German iTunes Music Stores
because they need to be resident in that country
and have a credit card issued to you there. However
you look at it, this goes against the spirit of
the European Union as a single common market.

Why Did They Do This?

Greed may be part of it, but since Apple barely
makes a profit on the iTunes Music Stores, but rather
uses it to sell iPods,
there has to be more to it than that. They may simply
be ignorant of the dynamics of the European Union
and the single market, though that seems unlikely.
In fact, it is much more probably the blame isn’t
to be found at Cupertino, but in the offices of
the music publishers.

About two-thirds of the cost of each download
goes straight to the music publisher, and they unquestionably
have the most to gain from charging the British
consumers more than their neighbours in France and
Germany. Their track record is pretty poor in this
regard, with the prices of DVDs and CDs being significantly
higher in the UK than in continental Europe. Partly,
this is complicated by the fact that distribution
rights for individual artists vary from one country
to another, even within the European Union (though
how long this chaotic state of affairs can last
can be debated). But the UK is also an intrinsically
expensive country to live in, and so it is much
easier for the record companies to hike up the prices
on CDs and DVDs, which are fundamentally inexpensive
items, and hope to get away with it. In Britain
this phenomenon even has a name, the “rip-off
Britain”.

What Happens Next?

The Consumers Association have made their appeal
to the Office of Fair Trading, the branch of the
British government that oversees commerce, and in
due course pronouncement will be made. If they deem
Apple to have a case to answer, then this could
lead to a comparable legal tussle similar to that
mentioned earlier with Volkswagen. If Apple loses,
then the prices will have to come down, if not,
then British consumers will have to put up or shut
up.

If Apple does get away with this, it could easily
work out to be a Pyrrhic victory. The iTunes Music
Store does have competitors, and if they lower their
prices sufficiently, these could easily out-compete
Apple. The UK is not an Apple stronghold, and enjoys
a Mac-using market share significantly smaller than
that in the US. For example, while Apple dominates
the school and university market in America, it
is very weak in comparable markets in the UK. The
reason for this is price: Apple computers are significantly
more expensive in the UK than in the US, and cash
strapped schools tend to buy with a view to keeping
costs down rather than ease of use. Take the new
G5 iMac, which costs around $1400 dollars including
sales tax in the US, but nearer $1700 including
VAT in the UK. (Oddly, some of these machines are
actually assembled in Europe, so import duties aren’t
fully to blame here.)

It wouldn’t take much for Apple to wind
up in a similar situation with the iTunes Music
Store. Once the novelty has worn off, and lower
cost alternatives become better developed, then
there is no reason to expect the very largely Windows-using
British public to choose those services rather than
Apple’s. This would be a terrible shame if,
as I suspect, it is the music publishers and not
Apple who are really to blame. While Steve Jobs
sometimes seems to have learned how to ride the
music industry tiger, British consumers may be right
to wonder where that tiger is carrying him off to.