2. Apple Broadens iTunes Portfolio, Quarrels With Media Companies

2007 closed with Apple's iTunes business going strong, but facing several challenges that could make things uncomfortable in future years. Among the hurdles are digital rights management and legal issues.
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2007 closed with Apple's iTunes business going strong, but facing several challenges that could make things uncomfortable in the future.

Apple CEO Steve Jobs posted an open letter on Apple's Web site in February calling on major record labels to drop requirements for digital rights management technology on music. Jobs said DRM hurts consumers and fails to stop music piracy.

It was a bold statement, considering that Apple's own DRM technology, FairPlay, is important to the company's business success in online music. FairPlay was developed to stop music piracy, but it also has the effect of tying iTunes media to iPods; FairPlay-protected music won't play on other vendors' portable media players. While users can convert FairPlay music to MP3s, the process is inconvenient and time-consuming, making it painful for consumers to switch from iPods to other vendors' media players.

iTunes is to digital music what Windows is to the desktop operating system. Apple has a 90% share of the downloadable music market, according to a report from Piper Jaffray.

Apple followed up on Jobs' announcement by launching in May iTunes Plus for DRM-free music tracks, for $1.29 per song, which is $0.30 higher than the price of music including DRM. The service launched with music from EMI, including singles and albums from Coldplay, The Rolling Stones, Norah Jones, Frank Sinatra, Joss Stone, Pink Floyd, John Coltrane, and more than a dozen Paul McCartney solo albums. At about the same time, Apple said it will not license FairPlay DRM to other vendors.

Apple dropped the price on iTunes Plus music to $0.99 in October, and expanded the catalog to include music by indie labels.

And Apple launched the iTunes Wi-Fi Music Store in the fall, to allow consumers to purchase music wirelessly through their iPod Touch or iPhone.

Meanwhile, music and movie distributors and TV networks, which supply iTunes with paid content, are rebelling against Apple's market control. NBC and Universal declined to renew their contracts with iTunes. Apple cancelled NBC's fall line-up on iTunes. Universal said it would sell music on iTunes at will.

And iTunes faced legal challenges. A Florida man filed a class-action suit charging Apple with illegal monopolistic practices over tying iPods to the iTunes Music Store. The lawsuit appears to be based on false premises that consumers "cannot transfer content purchased from iTunes to a non-iPod digital music player, nor can they download digital content from other online vendors to their iPods," according to AppleInsider.com. In fact, consumers can burn their iTunes FairPlay content to MP3s on CDs, and then transfer them to any other device that supports MP3s; it's clumsy for large volumes of music, but it works. Likewise, the iPod can play any music in MP3 format, such as music ripped from CDs or downloaded from the Amazon.com music store.