Apple Faces Federal Monopoly Suit

Apple Computer finally knows what it's like to be Microsoft a company that thoroughly dominates a market shutting out its competition through artificial links between its products. Unfortunately with that kind of success comes increased scrutiny and thanks to a recent federal ruling Apple is about to find itself in court facing illegal monopoly charges.

An intensely private company Apple currently faces several lawsuits, most of which are in the process of obtaining class action status. But only one lawsuit has the potential to harm the company in a manner similar to Microsoft's epic federal antitrust battle. Last July, a class action lawsuit alleged that Apple's decision to tie music sold from its iTunes Store to its dominant iPod device was illegal, threatened competition and harmed consumers.

In fact the charges specifically refer to the Sherman Antitrust Act which played a prominent role in Microsoft's United States antitrust trial and allege that Apple has unlawfully tied and bundled products obtained and maintained a monopoly and attempted to extend that monopoly into new markets. The charges also extend to various state antitrust laws such as California's Cartwright Act.

Apple sought to have the suit thrown out. But in a December 20, 2006 ruling US District Judge James Ware denied Apple's request, letting the lawsuit go forward. Apple has presented no reason for the Court to dismiss the Cartwright Act claim or the common law monopolization claim while allowing Plaintiff's federal antitrust claims, the court order reads. The Court denies Apple's Motion to Dismiss Plaintiff's anti-trust claims.

The plaintiff's complaint presents a stark look at Apple's strategies in the digital media market. "Apple deliberately makes digital music purchased at the iTunes Store inoperable with its competitors digital music players," the complaint reads. In order to play music from the iTunes Store on a digital music player then a consumer's only option is the iPod Apple sells the iPod at prices far exceeding those that would prevail in a competitive marketplace. Apple also makes the iPod unable to play music sold at its competitors online music stores. In order to purchase Online Music to play on an iPod then a consumer's only option is the iTunes Store.

The plaintiffs also highlight a dirty secret about the iPod that hasn't gotten much press outside of WinInfo. The underlying iPod hardware, which PortalPlayer manufactures natively supports Microsoft's Windows Media Audio (WMA) format making the iPod compatible with most competing online music services. But Apple shuts this compatibility feature off in the iPod with what Ware calls "crippleware." The order also notes that Apple is using the same strategy to shut out competition in the nascent video download market.

According to Judge Ware, the plaintiffs in the case were able to make sufficient cause for their tying and bundling claims. Regarding the monopoly charge, the judge did note that Apple has a qualified right to refuse to deal with competitors such as Microsoft. However, if that behavior adversely affects consumers, the defendant must justify its behavior. "Accordingly, the Court finds that Plaintiff has adequately alleged that Apple violated Section 2 of the Sherman Act," the order reads. Judge Ware also found that the plaintiffs argument for attempted monopolization was valid.

The big question of course is whether the plaintiffs in this complaint can succeed in court. Currently, Apple controls about 83 percent of the online music market, 75 percent of the online video market, more than 90 percent of the hard drive based MP3 player market and more than 70 percent of the flash memory based MP3 player market. Those are heady numbers, similar to those Microsoft enjoys in the OS market. And certainly Apple has actively worked to ensure that its products work only with each other and not with competing solutions. Is that illegal? We might just get the chance to find out.