Apple vs. France

The French have done it again. In an attempt to update copyright laws for the 21st century, lawmakers in France have thrown a giant spanner in the works of the nascent online digital music business. Late on Mar. 21, the lower house of the legislature, the Assemblé National, passed a law that will require sellers of digital-music players and online music services in France to open up their technical standards and become entirely interoperable.

The law, passed by the National Assembly by a vote of 296 to 193, requires companies that sell digital-music files in France to open up their digital rights management systems so that the files can be played on any device. The law, if ultimately enacted, may set the stage for Apple to shut down its digital-music sales operations in the country, though Apple hasn't said one way or the other if that is the case.


  Apple (AAPL) has sold more than a billion songs worldwide since launching the online service in 2003. But its songs are playable only on the ubiquitous iPod portable music player. Should the draft law ultimately be enacted and enforced, it could force Apple to make iTunes tracks available on other brands of players as well.

Apple is clearly the leader in the digital music business. But other companies including Sony (SNE) and Microsoft (MSFT) could feel the effects of the French law as well. All three use proprietary technology for digital rights management, the protection of content against unlawful copying.

In the longer term, though, the French legislation is a warning shot for the music business. Other countries could decide to enact similar laws, to protect consumers from "lock-in" by a single vendor. The European Commission also could take up the question of whether Apple's proprietary copy-protection scheme and dominant market share together constitute unlawful monopoly behavior.


  The European Commission is already investigating Apple's iTunes business, stemming from a complaint lodged in Britain by a British consumer group, accusing Apple of overcharging for its iTunes songs as compared to other online music retailers. That could be a boon to consumers by raising competition and lowering prices in digital music. But it could also torpedo an industry that is on just now getting off the ground after years of inaction and a massive wave of illegal sharing of unprotected digital music.

Apple slammed the legislation saying that a "state-sponsored culture of piracy" would not be far behind: "The French implementation of the EU Copyright Directive will result in state-sponsored piracy. If this happens, legal music sales will plummet just when legitimate alternatives to piracy are winning over customers. iPod sales will likely increase as users freely load their iPods with 'interoperable' music which cannot be adequately protected," the company said in a written statement.

Apple's stock was down $2.18, more than 3%, on the news. Apple doesn't break out iTunes or iPod sales by region, but reported a $174 million operating profit on sales of $1.2 billion for its European division in its most recent quarter. It has sold 14 million iPods worldwide.


  Apple isn't the only company selling digital music in France, but it is by far the best known. Others include Vivendi Universal (V), privately held Virgin Megastores, Sony (SNE), Miscrosoft (MSFT) MSN Music, and (ADBL), as well as the European Internet service providers Wanadoo and Tiscali, and the French retailer FNAC. But no other vendor's music is so closely tied to a particular brand of player as is Apple's.

Not only would the law require changes in the way these companies sell their digital music, but it would also legalize the creation of software that circumvents digital rights management technology. These DRM technologies -- Apple's is known as Fairplay -- establish the ground rules under which consumers can use the music, by limiting the number of copies the user can make (to one or more computers), the number of portable players to which the songs can be copied, and how widely they can be shared with other users, if at all.

It also loosens the penalties for sharing copyrighted music files. Under current law, digital pirates can be fined as much as $300,000 and see time in jail for unauthorized downloads. The new law would cut those fines down to about $50 if the download is intended for personal use and $180 for illegal sharing.


  One U.S.-based industry trade association was quick to criticize the legislation. "This goes against everything that's good about creating competitive technology and allowing the marketplace to do its will," says Morgan Reed, executive director for the Association of Competitive Technology, a Washington D.C. lobbying group.

It's unclear how the legislation might affect the digital music business elsewhere in Europe or around the world. Morgan Reed described the law as "unique to the French."

But two legislators behind the legislation issued a statement saying they hope other countries in Europe will follow the French example. "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," said a statement issued Tuesday from Richard Cazenave and Bernard Carayon, two deputies from the ruling party Union pour Movement Populaire (UMP).


  At least part of the power behind the legislation is a French consumer-rights group called Union Fédéral des Consummateurs-Que Choisir (UFC-Que Choisir). Last year the group sued Apple in a French court, saying that the company had violated French law by not disclosing the fact that songs sold on the iTunes store don't work with players other than the iPod, thereby tying the sales of one product to that of another. Apple is fighting the suit.

Having been passed by the National Assembly, the legislation now goes to the Senate, where it is likely to pass, says Francois Laugier, a lawyer with the the San Francisco law firm Ropers Majeski Kohn and Bentley, who is also licensed to practice law in France. Oddly enough, he says, Apple's best allies in any fight against this law may lie with French Socialist and Communist legislators who may oppose the law simply for the purpose of opposing those who favor it.

"If it passes the Senate," Laugier says, "there are members of those parties who have suggest that they would like to take the law to the Conseil Constitutionnel," or the constitutional council, the highest legal authority in France on matters relating to constitutional law. Somewhat analogous to the U.S. Supreme Court, the council has the power, for instance, to declare that certain provisions of a law violate the constitution, and thus render it invalid.


  Were Laugier advising Apple, he would suggest fighting the law in France. "I'd start lobbying the politicians who favor bringing it to before the council," he says. "The provisions of this law that affect Apple are actually very small, and the council might strip them from the bill, or modify them."

Failing that, since France is a member of the European Union, Apple could take the matter before legal authorities in Brussels, and argue that the French law conflicts with EU rules.

Then there's also the nuclear option: Pull iTunes out of France entirely. The potential of boosting sales of iTunes downloads, on which Apple makes only a few pennies, at the cost of losing sales of iPods, on which Apple can make a 50% margin, isn't much of a business trade-off. "Remember that the iPod drives iTunes downloads, not the other way around," says Michael Gartenberg, analyst with Jupiter Research in New York.


  Apple could do without market friction in France. Industry researchers like Gartner suggest that France is the biggest consumer of Macintosh computers in Europe. But legally prying open its DRM technology could have some nasty effects worldwide, and could cause Apple to shut down its iTunes operations in France. "France is only 60 million people, and aside from that there's the whole world," Laugier says. "It's a radical solution, but in the end it may be effective."

If France makes it legal to break Apple's DRM technology, that lets the genie out of the bottle for the whole world. "If some software that can circumvent Apple's technology in France, there's no reason it won't work elsewhere," Laugier says. "The Internet doesn't have borders."

Before it's here, it's on the Bloomberg Terminal.