Archives For iTunes

The WSJ Law Blog reports (via this AP Report) that the French law allowing regulators to force Apple to make its iPod compatible with rival offerings went into effect Thursday. “Me too” regulatory movements are already underway in Britain, Norway, Sweden, Poland and Denmark. This, as Microsoft plans to introduce “Zune,” its entry into the media player market. First, it was Apple’s shiny packaging and exploitation of consumer irrationality that explained Apple’s success in the media player market. Now, the French law adopts a different theory: it’s iTunes.

It goes something like this: Apple is a dominant firm and is exercising market power by excluding would be rivals from using its software (iTunes) to increase its market dominance. Throw in a couple of buzzwords like “network effects,” “first-mover advantage,” “path dependence,” and “lock-in,” and we’ve got ourselves a 21st century style antitrust case. By the way, I don’t mean to suggest that these economic phenomena are not “real.” I just mean that we should not let theory get in the way of facts here. And the fact is that the iPod has generated huge benefits for consumers and there is no threat of competitive harm in sight.

But since we’re here, lets talk about the theory of competitive harm here. Professor Bainbridge, for instance, is skeptical that Zune will prove to be an “iPod Killer” because Apple is reaping the competitive benefits of “path dependence” in the presence of network effects that have created substantial barriers to entry:

Apple has managed to create a proprietary system in which music downloaded from can be played only on iPods (hence, France’s recent attempt to legislate opening the iPod format). If you’ve been an iTunes user for some years, as I have, you’ve got a huge investment in downloaded music. The costs of buying all that music over again so as to use it on a Microsoft Zune strike me as prohibitive . . ..

Toss in herd behavior, whether you call it a fad or brand cachet, and Apple looks to have pretty serious lock-in effect. It’s hard to think of any other Microsoft competitor that had such a built-in protection against competition. Netscape didn’t. WordPerfect didn’t. In both cases, there were few barriers to switching. Perhaps Sony’s Playstation is the only comparable example, and in that case while the xBox has dented Playstation, it surely hasn’t been a Playstation “killer.” So it’s very hard for me to believe Zune will prove an iPod killer.

To be fair, the good Professor does not suggest anywhere in his post that Apple’s bundling is an antitrust problem (just that Zune will not “kill” the iPod). I certainly don’t know whether Zune will be uproot Apple’s iPod success. Maybe they will offer a unique service with new features, maybe they will pay consumers to replicate their iTunes libraries, maybe they will fall flat on their face. Maybe Apple’s new attempts to increase distribution by integrating iPod functionality in automobiles will attract new consumers and keep current iPod users. I don’t pretend to have the answer. The answer is best left to the marketplace. My point is simply to illustrate the underlying economic concepts underlying the call for mandatory unbundling. Enough of that. Some thoughts on bundling, the French law, the underlying anticompetitive theory, and comparisons to Microsoft below the fold.
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