OAKLAND, Calif. -- Plaintiffs on Tuesday started outlining their case against Apple, saying in a courtroom here that the electronics giant kept iPod prices high by implementing unneeded software updates.
Because Apple wanted to hurt competitors and ban their music from iTunes, it ended up harming consumers in the process, attorneys for two plaintiffs in a class action antitrust lawsuit argued.
The trial, which is slated to last nine days, will decide an almost decade-old claim that Apple's MP3 players may have been overpriced while the company used its iTunes software to squash cheaper devices.
The crux of the case is a set of now-defunct policies that Apple instituted in the earliest days of the iPod to control how and where users of iTunes and owners of its music players could play back purchased songs. The plaintiffs argue that Apple, in restricting iPod owners to songs purchased only through iTunes and in banning songs from iTunes from playing on competing MP3 players, the company stifled competition. That kept iPod prices artificially high, the plaintiffs say.
"Apple made those changes to its software after top executives at Apple learned that competitors had figured out a way to have their songs played on the iPod," Bonny Sweeney, the lead plaintiffs' lawyer, said Tuesday. "And there was a concern by Apple that this would eat into their market share."
Apple's lead attorney refuted those claims. "This insertion of the stranger in the middle could not get everything right. It posed a danger to the consumer experience and to the quality of the product," William Isaacson said in defense of Apple's software updates. Isaacson also pointed out that the plaintiffs' claim that iPod prices were inflated happened to be at a time when iPod storage increased while prices either fell or remained flat. "There should be no damages here because prices went down and quality went up."
The plaintiffs, Melanie Wilson and Marianna Rosen, are seeking $350 million. Because of its class action status, the lawsuit could award damages to as many as 8 million people who purchased an iPod between September 12, 2006, and March 31, 2009. Apple marketing chief Phil Schiller and iTunes chief Eddy Cue are set to take the stand in the coming days, and the plaintiffs also will play videotaped deposition from former CEO Steve Jobs, who died in 2011.
This case is not Apple's first antitrust rodeo. The company, thanks to Jobs' often bullheaded business tactics, has been embroiled in other high-profile cases concerning the iPhone maker's competitive strategies and whether they stepped over the line. In 2010, Apple was accused of conspiring with other tech firms to fix employee wages to prevent competitors from recruiting top talent from one another.
Two years later, Apple was accused of leading a charge in the e-book industry against Amazon, conspiring with the top US book publishers to fix prices of digital titles higher than Amazon wanted to sell them to consumers.-- it may soon begin paying $400 million to as many as 23 million e-book customers -- and a rejected means Apple will face another antitrust trial in April.
The current case involving iPods is complex, having evolved significantly since the original January 2005 filing. The suit initially alleged that Apple broke the law by restricting owners of its iPod to songs purchased only through iTunes. A court deemed that legal, however, and the plaintiffs have since altered the suit, alleging instead that Apple made a series of software updates to iTunes specifically designed to shut out competing music stores' ability to load their songs onto iPods.
The case will aim to determine what effect Apple's FairPlay technology -- a so-called digital rights management tool that acts like a watermark made of code -- had on the market for MP3 players when it restricted iPod owners to iTunes and how to interpret Apple's behavior in protecting FairPlay using software updates. Apple refused to license FairPlay to competing music stores and would not allow other MP3 players to connect to iTunes. The plaintiffs lawyers will need to prove that Apple's actions were in violation of Section 2 of the Sherman Antitrust Act and California's Unfair Competition Law.
Apple says that competing online music stores like RealNetworks, which designed a specific tool called Harmony so that customers could load its MP3s onto their iPods, were using the "ethics and tactics of a hacker." The crucial updates to Apple's iTunes software, numbered 7.0 and 7.4 and released in September 2006 and September 2007, were designed not to block companies like RealNetworks, Apple says, but to improve the user's experience and maintain the security of its software.
The plaintiffs' argument, however, is that the updates "did not make the iPod faster, improve sound quality, did not make the iPod sleeker or smaller or cooler," but "prevented customers who had legally purchased songs from Apple's competitors from playing those songs on their iPod," Sweeney said.
Such "genuine product improvements," as they're called, would exempt a company's actions from being deemed anticompetitive. iTunes 7.0 is notable for introducing digital movie purchases to the store. Jobs called it at the time "the most significant enhancement" to iTunes "since it debuted in 2001." Yet the updates also contained specially designed code that would go so far as to force users to reset their iPods if they were loaded with unauthorized MP3 files, wiping the devices clean.
"These fixes were really directed at competitors -- it blew up everything if you used a third-party player," said Roger G. Noll, a professor emeritus of economics at Stanford University and the first expert witness called by the plaintiffs Tuesday. "That was Apple's fix."
Apple's Isaacson says the iTunes 7.0 and 7.4 updates were designed to improve security and purposefully keep third parties like RealNetworks, which Apple still considers a hacker, out of its system. "Harmony was outdated when FairPlay was updated. All Apple was doing was updating FairPlay," he said. "That's what happens when you reverse engineer the product and there's an update of that architecture."
Neither RealNetworks nor any of the retailers named in the suit, including Best Buy and Walmart, have filed suits of their own. RealNetworks executives will not appear as witnesses. Instead, the trial will hinge on the words of Jobs and other Apple executives on the architecture of FairPlay and iTunes development and expert testimony on both sides from university professors on the strengths and weaknesses of the plaintiffs' antitrust argument.
Ultimately, the case will not impact Apple beyond the potential monetary damages. The company began offering DRM-free music in January of 2009 and FairPlay is now used only to monitor the number of computers and other devices to which a user has downloaded a media file or mobile app. Music and other licensed media purchased from other companies like Amazon and Google can now be played on Apple devices.
Yet more interesting is that the music landscape is now drastically different now than it was just seven years ago. The iPod has been on a steady decline since 2008 -- smartphones having demolished the MP3 player business -- while digital music downloads have begun losing ground to subscription streaming services like Spotify.
--Shara Tibken contributed to this report.
Update at 11:32 a.m. PT: Added comment from Apple's opening arguments.