Steve Jobs: iPod, iTunes competitors were 'collateral damage'

In a taped deposition shown in antitrust court Friday, Apple's late CEO argued that record label contracts and security holes were the company's primary concern.

"We were the only big company involved in this stuff at this time, the one with the deepest pockets," former Apple CEO Steve Jobs said about the early digital music industry in a videotaped deposition shown in court here Friday. Courtroom sketch by Vicki Behringer

OAKLAND, Calif. -- In a courtroom here Friday, the face of the late Steve Jobs appeared on a video monitor as Apple's then-CEO was asked questions aimed at determining whether the company broke antitrust laws in the early days of the digital music industry.

The video, never before released and taped six months before Jobs' death, is part of the plaintiffs' testimony in a class action suit against Apple. Filed in 2005, the case has been kicked around the courts until heading to trial Tuesday. Plaintiffs now allege Apple used updates to its iTunes software in 2006 and 2007 to harm competing music stores. The plaintiffs seek about $350 million in damages for more than 8 million customers who purchased certain iPod models between September 2006 and March 2009.

Because Apple prevented digital song files from competing music stores from being loaded onto consumers' iPods, it maintained a monopoly on digital music and locked consumers into its software and hardware ecosystem, plaintiffs allege. That hindered rivals' MP3 players or music stores to compete and kept iPod prices artificially high, plaintiffs say.

Jobs' response three years ago is in line with what Apple executives have repeated in court here this week: That Apple did not block competitors and harm consumers, but was protecting its record label contracts and plugging security holes.

"We had pretty much black and white contracts with the labels," Jobs said in the deposition. Those contracts stipulated that if people violated Apple's FairPlay digital rights management system, a technology that would detect other music stores' song files and prevent users from loading them onto the iPod, "...that would be in clear violation of the licenses we had from the labels and they could cease giving us music at any time."

Jobs was also asked about the efforts of competing digital music stores like RealNetworks, a company that developed software called Harmony that would reverse engineer Apple's FairPlay to let iPod owners put RealNetworks' music on their devices. Through iTunes updates, Apple continuously broke Harmony, an action plaintiffs say was anticompetitive because it degraded the consumer experience and was an example of Apple wielding a monopolistic position in the market. Jobs response? Harmony was undermining Apple's end-to-end product ecosystem.

"We were very concerned with somebody like Real [Networks] promising customers that they would have compatibility, when in the future they might not," he said. "That's not something we could guarantee. So we could get sued by all these people." RealNetworks is not named in the suit and none of its executives will appear in court.

Jobs called breaking competitors' software "collateral damage," and repeatedly said record labels made conflicting requests from Apple -- on one hand asking them to open their system to competitors to increase music sales while on the other requesting that Apple continue updating its DRM technology to prevent hackers.

"There are lots of hackers trying to hack into these things so that they can do things that would put us in noncompliance with the contracts we have with the music companies," Jobs said. "We were very scared of that." In an email to his executive staff shown in court, Jobs suggested that Apple refer to RealNetworks as a hacker. Apple was drafting a press release at the time about RealNetworks' Harmony service DRM translation technology that promised iPod compatibility. The plaintiffs are alleging that iTunes updates, specifically 7.0 and 7.4, were designed intentionally to harm companies like RealNetworks.

Jobs' demeanor and responses suggested that Apple did not view any one company as a legitimate threat and he personally did not take the iPod antitrust case very seriously.

"We were the only big company involved in this stuff at this time, the one with the deepest pockets," Jobs said. That sentiment may be used against Apple, whose witnesses have so far argued that Apple was not trying to quash competitors, did not have a monopoly in the greater music industry and was facing competition from so-called "iPod killers" -- primarily from Microsoft and its Zune platform -- in the MP3 player market.

"That's a classic issue in antitrust cases: defining the market," said David Olson, an assistant professor at Boston College Law School and an antitrust expert. "Apple was perceived at that time to be not anywhere near as dominant as Microsoft seemed to be in the late 90s with 90 percent of the [PC] market and on their way to 100 percent."

More than three dozen times in his testimony, Jobs responds to a question by saying he could not remember or did not know. The plaintiffs' lead lawyer Bonny Sweeney asked Jobs if he remembered RealNetworks at the start of the deposition.

"Do they still exist?" he replied.

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