The Curse of Apple's Success

Apple, Inc., maker of the Macintosh computer and the iPod, never lets anyone forget what it isn't—Microsoft. The company's ads show a hipster named Mac humiliating a pale, pudgy loser named PC; its slogan urges consumers to "Think different." But as Apple has evolved from struggling computer maker to digital media giant, it now finds itself cast in a role that had been Microsoft's alone—European corporate villain.

When Apple's iTunes online music store arrived in Europe in mid-2004, it became an overnight sensation. Customers downloaded 800,000 songs in the first week. Soon iTunes owned as much as 70 percent of the entertainment download market. By giving customers an easy, affordable and legal way to download MP3 files from the Web to their iPods, Apple had turned an illicit act into a viable business, one it means to keep for itself. CEO Steve Jobs allowed the Mac to become an also-ran rather than open its operating system. Now, he's being pushed to loosen the reins on iTunes—and he's pushing back.

Last summer the first signs that Europe might be losing its taste for Apple appeared when Norway's consumer-protection agency filed a complaint claiming that iTunes violates Norwegian law. At the heart of the complaint was Apple's inclusion of digital-rights-management (DRM) software in iTunes, which prevents files downloaded there from being played on non-Apple gadgets like mobile phones. DRM also prevents songs downloaded from other sites, like Yahoo or Napster, from playing on an iPod. Put simply, "customer friendly" Apple was tying its customers' hands.

Norwegian consumer watchdogs weren't the only ones to complain. By the year-end, regulators in Finland, France, Sweden, Denmark and Germany had opened investigations into whether DRM software was fair. On Jan. 27, the Dutch upped the ante, setting a September deadline for Apple to dump its "illegal" DRM, a month earlier than a similar deadline set down by Norway.

Sound familiar? It should. Courts in Europe and the United States held that Microsoft has locked out competitors' products in violation of antitrust laws by bundling its media player and Web browser in Windows. But only in Europe, where trustbusters have become more aggressive than in the United States, did they force the company to unbundle its products. Now they want to force Apple to make its products work with those made by other companies.

So what's driving this sudden burst of rancor? The answer may be partly a question of size. With $9.6 billion in revenue from digital entertainment, Apple has become a colossus; it owns 70 percent of the European market for digital entertainment. As Keith Woolcock, a technology analyst with Westhall Capital in London, observes, "It's the curse of success. They're walking into the middle of every issue from labor standards to consumer rights, just by being big."

Apple is also disruptive. Already, the company has turned music giants on their heads. As the boundaries between the Web, television, music, movies and phones collapse onto each other, Apple has so far been the most successful rider on a wave that could swamp companies as dissimilar as France's Vivendi, Finland's Nokia and Germany's Bertelsmann. It's no wonder that in each of these countries, regulators have added their voices to the outcry against iTunes. "Any time politicians get involved, you have to assume something political," Mike McGuire, a Silicon Valley-based analyst with Gartner Research, observes dryly. "I actually think this is more about European politics than anything else," adds Mark Mulligan of Jupiter/Kagan Research in London. Should the various cases end up in court, Apple could mount a strong defense. After all, DRM was forced upon the company by the major music labels, three of which are European, in exchange for the rights to sell their music on the Web. It's an irony that's not lost on Apple CEO Steve Jobs, who earlier this month made this point in an open memo to consumers, posted on the company's site. It was a clever move to align the company with the sort of anti-DRM consumer sentiment overwhelmingly expressed on Apple users' chat sites and blogs. Denouncing DRM and shifting the blame for Apple's use of it isn't the same as getting rid of it, but it does suggest that Jobs wants to avoid looking like the bad guy, even if his company still benefits from bad behavior.

Benefiting they are. Apple's European sales were up 33 percent last year. But there are signs that the company's core fan base of techies is cooling. One Internet poll shows that 98 percent of respondents favor dumping DRM. Digital-rights pressure groups like Defective by Design have picketed Apple stores in London, and called upon everyone from Parliament to Bono to take up the cause of interoperable software standards. Keeping ahead of this sort of public opinion is a smart idea, and one that may ultimately separate Apple from its cartoon rival. Serial litigator Microsoft became so reviled that the creators of the raunchy "South Park" cartoon series could bring movie audiences to their feet, cheering a scene in which an animated Bill Gates gets shot in the head.

Right now a similar fate for the media-savvy Jobs seems a way off. His careful courting of the company's hugely loyal consumer base coincides with Apple's much-anticipated foray into the mobile-phone business. That's an industry European firms like Nokia, Philips and Ericsson dominate, and one that the EU keeps a close eye on. As Apple unveils its latest disruptive technology, the iPhone, this summer, Jobs is no doubt hoping that Europe's regulators and consumers alike will "think different."

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