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eMusic: Apple's bundled-music device would be anticompetitive

Rival digital music service is among critics who say such a plan would enable Apple to use its huge market share of digital players to weaken retail competition.

UPDATED 2:55 p.m. (To include legal challenges to alleged anticompetitive relationship between iPod and iTunes.)

Apple is in for a fierce legal fight should it ever release a device that offers all-you-can-eat music, according to David Pakman, CEO of rival digital music service eMusic.

"It smells like classic Sherman Antitrust Act to me," Pakman said. "I only know what I've read but the plan sounds very similar to the tying practices Microsoft used with Windows/Explorer. And Microsoft is still paying the penalties for that one."

The Financial Times reported Tuesday that Apple is in talks with the four largest record labels about offering a device with access to the entire iTunes music library. A source close to the negotiations confirmed the report in an interview with CNET and said the offering would be free initially but device owners would later be charged subscription fees.

The talks are preliminary and no agreements have been reached, the source said. That hasn't stopped some of Apple's competitors and antitrust lawyers from sounding alarms.

Pakman says Apple is following Microsoft's lead. In 1998 the U.S. Department of Justice filed a lawsuit accusing Microsoft of monopolistic practices by bundling Internet Explorer with its Windows operating system. The case was settled in 2001. In that case Microsoft had monopolistic position in operating systems with Windows, the government charged. The company achieved dominance in browsers by forcing Windows buyers to use Microsoft Explorer.

The parallel is that Apple is forcing people who buy this device with preloaded music to buy its music, Pakman argues.

An Apple spokeswoman said the company doesn't comment on rumor or speculation.

Critics say that Apple, which sells 70 percent of all digital music devices, could use its overwhelming market share to wall out competitors. No other music services--download or subscription--could sell songs to such a device. Music listeners wouldn't need to get their music anywhere else. Competition among digital music retailers would suffer, said Pakman.

Such a plan "would produce a long and drawn out fight in both the U.S. and European courts," Pakman said.

What's the difference between a device that bundles music and the relationship between iTunes and iPod? Weren't they tied together?

The answer is yes and they have been challenged in U.S. and European courts. A year ago, two separate lawsuits, which have now been consolidated, accused Apple of unfair competition, maintenance of a monopoly power and "unlawful tying." That case and a similar one, Black vs. Apple, are pending, according to documents Apple filed with the Securities and Exchange Commission.

In France, a consumer group has alleged that Apple has violated that country's consumer laws by failing to mention that the iPod is "allegedly not compatible with music from online music services other than the iTunes store" records show.

Maxwell Blecher, an antitrust expert with the Los Angeles firm of Blecher & Collins, agreed that Apple could face legal challenges for bundling if other music vendors are indeed prevented from distributing songs to such a gadget. "Apple is going to argue that they compete with lots of other similar devices," Blecher said. "You have to look at whether there are exclusionary aspects or conduct. In that debate lays the outcome of any lawsuit."

Universal Music Group has already signed a deal with Nokia to enable buyers of some of its devices to gain access to all of Universal Music's library. The music industry source said that UMG is in talks with several other handheld manufacturers as well. But no handheld maker has struck a deal with all four of the top music companies. Apple could be the first.

But just because smaller players in the market may have similar deals may not be enough to prevent Apple's deal from being challenged, said Blecher.

"When Apple came out with the iPod, only Apple could deliver music to it," Blecher said. "They accused Apple of exclusion. When they did the iPhone, it was impossible to shift to other carriers. They said that was exclusionary...any time you have high market share and restrict competition in any way, you're going to raise antitrust concerns."