Northwestern Journal of Technology and Intellectual Property Volume 5 Article 5 Issue 2 Spring Spring 2007 Is Apple Playing Fair? Navigating the iPod FairPlay DRM Controversy Nicola F. Sharpe Olufunmilayo B. Arewa Recommended Citation Nicola F. Sharpe and Olufunmilayo B. Arewa, Is Apple Playing Fair? Navigating the iPod FairPlay DRM Controversy, 5 Nw. J. Tech. & Intell. Prop. 332 (2007). https://scholarlycommons.law.northwestern.edu/njtip/vol5/iss2/5 This Perspective is brought to you for free and open access by Northwestern Pritzker School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of Technology and Intellectual Property by an authorized editor of Northwestern Pritzker School of Law Scholarly Commons. NORTHWESTERN JOURNAL OF TECHNOLOGY AND INTELLECTUAL PROPERTY Is Apple Playing Fair? Navigating the iPod FairPlay DRM Controversy Nicola F. Sharpe and Olufunmilayo B. Arewa Spring 2007 VOL. 5, NO. 2 Northwestern Journal of Technology and Intellectual Property Volume 5, Number 2 (Spring 2007) Is Apple Playing Fair? Navigating the iPod FairPlay DRM Controversy By Nicola F. Sharpe* and Olufunmilayo B. Arewa** I. INTRODUCTION ¶1 On April 2, 2007, Apple Inc. and EMI Music held a joint press conference in London that may be the harbinger of significant changes in the digital music arena.1 This press conference, whose attendees included EMI Group CEO Eric Nicoli and Apple CEO Steve Jobs, unfolded in an environment of significant technological and commercial changes in the music industry. The shift to the digital era has been a turbulent one for many players in the music industry, particularly as a result of the widespread distribution of unauthorized digital music files and the concurrent significant decline in record industry sales.2 The Apple-EMI agreement permits Apple to sell EMI Music’s entire digital music catalog without digital rights management (DRM),3 which represents a significant shift from the previous policy of the major record companies. Such companies have until this point typically required that music distributed in digital form include DRM restrictions on use and copying.4 ¶2 The Apple-EMI announcement should be considered in light of the recent developments in the broader digital music market.5 Apple has in many respects played a pivotal role in those developments, transforming itself from a technology company to an entertainment company with its core strength in the sale and distribution of digital * Visiting Assistant Professor, Northwestern University School of Law. B.A. Cornell University; J.D., M.B.A., Yale University. Email: [email protected]. **Associate Professor, Northwestern University School of Law. A.B., Harvard College; M.A., Ph.D., University of California, Berkeley (Anthropology); A.M., University of Michigan (Applied Economics); J.D., Harvard Law School. The authors would like to thank Paul Heald, Steve Ramirez, Max Schanzenbach, and Jamelle Sharpe for their comments and for inspiring us to expand this project. Any errors, of course, are ours alone. Email: [email protected]. © 2007 Nicola F. Sharpe and Olufunmilayo B. Arewa. 1 EMI Group Press Release, EMI Music Launches DRM-Free Superior Sound Quality Downloads Across Its Entire Digital Repertoire, Apr. 2, 2007, http://www.emigroup.com/Press/2007/press18.htm; Apple Inc. Press Release, Apple Unveils Higher Quality DRM-Free Music on the iTunes Store, Apr. 2, 2007, http://www.apple.com/pr/library/2007/04/02itunes.html. 2 See Nicola F. Sharpe & Olufunmilayo B. Arewa, Interoperability, Antitrust and Consumer Welfare: Is the Apple iPod Changing its Tune? (2007) (manuscript on file with authors). 3 See EMI Group Press Release, supra note 1; see also infra notes 26 to 32 and accompanying text. 4 With a few notable exceptions, such as Sony Rootkit software, which was anticopying software installed on certain Sony CDs that also secretly collected security information from computers playing the CD, music content contained on physical CDs has generally not been subject to DRM or other protective measures to prevent copying. See Sharpe & Arewa, supra note 2. 5 See infra notes 115-128 and accompanying text. Vol. 5:2] Nicola F. Sharpe and Olufunmilayo B. Arewa music.6 Apple derives its strength from the iPod portable digital music player, which is currently the world’s dominant digital music device.7 Apple has also become one of the largest sellers of musical content in the U.S.8 Although Apple has now agreed to distribute music from the EMI catalog without DRM, many believe the technological choices that Apple has made in the past surrounding DRM technology have laid the foundation for Apple’s market dominance.9 Until now, Apple has facilitated its market dominance by deliberately limiting interoperability with non-Apple devices and non- Apple online music stores for iPod device and iTunes Music Store (“iTMS”) users.10 From a technology perspective, this bundling11 of the iPod with iTMS has been made easier by virtue of Apple’s FairPlay DRM, which limits usage of music purchased from iTMS.12 Apple’s bundling of the iPod and iTMS, which together form a network, has led to lawsuits against Apple alleging antitrust violations ranging from tying to attempted monopolization; some foreign jurisdictions have gone so far as to threaten to ban certain Apple technologies on consumer protection grounds.13 This type of legal pressure has likely played a role in Apple’s decision to sell digital music without DRM in partnership with EMI.14 ¶3 The technological choices that Apple has made in developing the iPod and iTMS raise difficult questions about the emergence of new technologies, the development of markets for innovative products, and how existing legal frameworks, including intellectual property and antitrust laws, should deal with new technologies and new 6 See Sharpe & Arewa, supra note 2. 7 Id. 8 Nick Wingfield & Ethan Smith, Music’s New Gatekeepers, WALL ST. J., Mar. 9, 2007, at W1 (noting that Apple is now one of the largest sellers of music in the U.S.). 9 See Sharpe & Arewa, supra note 2. 10 The iPod controversy highlights potential ambiguities in uses and understandings of the term interoperability, particularly with respect to consumer devices. Interoperability may refer to technological possibility, which might exist if any potential consumer could make a device interoperable. Under this view of interoperability, devices might be characterized as interoperable despite the fact that only technologically sophisticated consumers are able to interconnect the devices. Alternatively, interoperability may refer to devices that are “plug and play,” where even technologically unsophisticated users are easily able to interconnect devices. These differences in uses and understandings of the term interoperability are evident in the iPod/iTMS controversy, where Steve Jobs sees Apple’s products as already interoperable with those of competitors. In contrast, the lawsuits against Apple and assertions from European regulators make different assumptions about what constitutes an interoperable device. The understandings of the term interoperability by plaintiffs in lawsuits and European regulators are based on assumptions about what should constitute an interoperable device, based at least in part on both the ability of users of average technological sophistication as well as the number of intermediate steps that might be required to interconnect devices. Discussions of interoperability in this article reflect the varied uses of the term in different contexts but do not always identify the specific derivation or explicitly identify the assumptions made about interoperability in particular instances. For further discussion of this point, see Sharpe & Arewa, supra note 2. 11 While economists and some U.S. courts at times use the term “bundling” and the term “tying” separately, this article will use the terms interchangeably. See U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION 103 (2007), available at http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf (noting that the term bundling “typically refers to a sale in which products are sold only in fixed proportions,” whereas the term tying is typically used when the portions are not fixed. “Case law in the United States sometimes uses the terms ‘tying’ and ‘bundling’ interchangeably.” (citations omitted)). 12 Sharpe & Arewa, supra note 2. 13 Id. 14 Id. 333 NORTHWESTERN JOURNAL OF TECHNOLOGY AND INTELLECTUAL PROPERTY [2007 innovations. To address these questions, this Article examines the iPod/iTunes network and argues that while innovation, intellectual property laws, and network effects may in part explain Apple’s market dominance, consumer welfare should be taken into account in legal assessments of the iPod/iTMS bundle, as well as the competitive market consequences of Apple’s bundling. Specifically, where new technologies once increased the choices available to consumers, growing recognition exists today that such technologies may now unnecessarily constrain consumer choices.15 ¶4 This Article lays out the topography of the Apple FairPlay controversy, looking closely at the business and market environment within which the iPod/iTMS network arose. This Article does not seek to draw conclusions about the legal status of the iPod/iTMS network under existing laws. Rather, it outlines some ways in which existing legal frameworks may be applied to the structures and behaviors associated