Introduction
Thanks to the early market instinct of iTunes, the success of the iPod, and the fact that the iPod does not play (DRM-protected) music other than FairPlay protected music, iTunes FairPlay DRM is a desirable resource for many of iTunes’ competitors. Part of a clever business strategy, the iPod is able to play all files bought through iTunes and non-protected MP3 files from various (legal and illegal) sources, making it an attractive device for consumers. What the iPod does not do is to support any of the rivalling standards used by competing commercial download services, neither is it particularly willing to license FairPlay to rivals. In other words, Apple faces consumers with the choice: "Are you with us or are you with them?"

In response, there have been various attempts to get around Apple’s refusal to licence FairPlay, so that competitors could make their services/devices compatible with the popular iTunes standard. RealNetworks, for example, one of Apple's arch enemies, tried it with reverse engineering and sold music downloads for the iPod in its own unlicensed version of FairPlay . Apple changed its technology and threatened to file suit against RealNetworks (Bangeman 2004). Subsequently, RealNetworks changed its strategy and launched the "Freedom of Choice" campaign to mobilise consumers against the rival’s business methods and services. Goal of the campaign was, so RealNetworks, to help consumers "break the chains that tie their music device [iPod] to proprietary music downloads". And, according to RealNetworks, "We are here to inform AND motivate" (RealNetworks 2004). Having said that, it is obvious that RealNetworks’ motives were not purely altruistic. RealNetworks understood very well that a combination of successful hardware and a proprietary software standard can be a very successful strategy to exclude unwanted competitors, such as RealNetworks, from one’s customer base (here: the large iPod population). Or to extend one’s own customer base: this is what Microsoft is trying with its own Media Player technology which is offered at favourable licensing conditions to music services and device makers, thereby seeking to outdo Apple.

The French entertainment company VirginMega tried another way: the legal way. It filed in 2004 a complaint against Apple Computers France with the French competition authority, the Conseil de la concurrence (Conseil de la concurrence 2004). VirginMega offers its own music download service and uses for this purpose a different DRM solution, namely Microsoft’s DRM. Because of the proprietary nature of the iPod, consumers who buy digital music files from VirginMedia cannot, thus the argument of VirginMega, transfer these files to their iPods. VirginMega requested a licence from Apple for FairPlay so that it could encode its music files in the FairPlay format. Apple refused. VirginMedia claimed that the refusal to grant access to the FairPlay DRM constitutes an abuse of a dominant position according to French competition law and Article 82 of the EC Treaty – and that is where the case became interesting for lawyers and the legal-minded. The goal of this article is to report about the decision – in a shortened and rather simplified version (for an extensive discussion, see Helberger 2005) and the arguments that the French competition authority used to deny the request.

The infamous Essential Facilities Doctrine
The French competition authority examined the access request of VirginMega and recalled for this purpose the jurisdiction of French courts and the European Court of Justice in so called Essential Facilities Doctrine cases. Some words of explanation are in place.

Article 82 (a) of the EC Treaty contains a broad general principle that stipulates that companies in dominant positions must not refuse to supply their goods or services if refusal to supply would significantly impact competition. Having said this, the granting of access to a facility goes beyond the mere duty to supply. The obligation to share one’s own assets with competitors can result in considerable conflicts with commercial interests and economic freedoms, including the right to property and the freedom not to be forced to promote competitors at one’s own cost (European Commission (1987), European Court of Justice (1998) and (1995), to name but some). In addition, the sharing of one’s resources can trigger considerable security risks for the resource operator, as well as capacity problems and additional costs. All these are reasons why the European Court of Justice, the European Commission and scholars have argued that the obligation to share one’s resources should remain subject to stricter conditions those foreseen by Article 82 (a) of the EC Treaty. Access obligations should be reserved for exceptional circumstances, which are summarised in the so called Essential Facilities Doctrine. The Essential Facilities Doctrine has been proclaimed by some scholars as a "powerful tool to pry open markets" (Furse 1995), while it has been viewed rather critically by others.

The Essential Facilities Doctrine says that any dominant company that controls a so-called "essential facility’ and that refuses access to competitors without objective justification or that grants access only on terms less favourable than those that it offers its own associates, acts in breach of Article 82 (a) of the EC Treaty. An essential facility in the sense of the Essential Facilities Doctrine may be a product, a service, content, infrastructure, technical facilities or access to a physical thing such as a harbour or an airport. In other words, Virgin could stand a chance to force Apple’s iTunes to share the FairPlay DRM if (1) Virgin can prove that Apple is a dominant player, that (2) FairPlay is a facility access on which Virgin depends if it wishes to supply its customers with music services and that (3) implementing an alternative DRM standard is not an economically viable option. Finally, it would have to (4) demonstrate that certain economic interests of iTunes, concerning available capacity, security, technical standards and reasonable remuneration interests, are accommodated.

The decision of the French Conseil de la concurrence
The decisions of the French competition authority is instructive as it is, to the knowledge of the author, the first time that a European competition authority had to decide about the legitimacy of a refusal to grant access to a DRM standard under competition law. It is interesting to note that the Conseil de la concurrence found that a technology that implements a proprietary standard could constitute an essential facility. In other words, it is not the facility itself but the standard that is embedded in the facility that can make it essential for market entry for others. In the end, it decided against a foreclosure effect, acknowledging that market foreclosure due to control over a dominant DRM standard could not be excluded under different circumstances (see Mazziotti 2005). The competition authority found Apple to be dominant in the markets for portable music players and downloaded music. For this purpose, the agency developed a number of arguments. The Conseil de la concurrence identified three aspects that were in its opinion relevant when deciding whether FairPlay is an essential facility:

a. The actual usage habits of consumers regarding music download,
b. Possibilities to circumvent the problem of lacking interoperability, and
c. The developments in the market for portable music players.

The Conseil de la concurrence concluded that FairPlay was not an essential facility for the following reasons: First, the competition authority found that only a minor share of the market would listen to music from a portable device, the majority would listen to music via the computer or burn songs onto a CD. Second, and rather unorthodoxly, it described in detail a method how consumers could get around the existing lack of interoperability and download music from VirginMega onto their iPod. Third, the French competition authority found that the market for portable music players was sufficiently competitive and offered several portable players in addition to the iPod. In other words, there were alternative players available that could process VirginMega’s DRM standard. In conclusion, the French competition authority did not consider FairPlay an essential facility because consumers had a choice: access to the FairPlay standard was not necessary to offer consumers VirginMega’s music. It furthermore found that the market for online music was actually competitive as there were at least two major operators active in that market (Conseil de la concurrence, paragraphs 96-103). In addition to its doubts whether the FairPlay DRM was an essential facility, the French competition authority also questioned the causality between VirginMega’s lesser economic success and the access refusal. It argued that Apple probably had the more successful business strategy and was for this reason market leader, thereby raising the free-rider issue.

Discussion
Virgin’s attempt to call upon competition law to get access to the FairPlay standard failed, at least before the French competition authority. I tend to say: rightly so. Because of its economic implications, the essential facilities doctrine should be applied with caution and be a last resort when competitors are otherwise completely excluded from offering a new service. This is not to say that the present development – segmentation of the music market into a number of competing and non-interoperable DRM standards – is a situation that should be tolerated. Far from it.

The point that I want to make is that because of the many insecurities and difficulties in defining whether its conditions are given, the Essential Facilities Doctrine does not provide potential market players with the legal security that is necessary when launching a new business. Moreover, the application of the Essential Facilities Doctrine to enforce access to a technical standard or interoperability is highly problematic, especially where such standards are protected by intellectual property rights and trade secrets (see the discussion in Leveque (2005) and Mazziotti (2005). Another argument is that in the competition law analysis, economic reasoning commonly prevails; public information policy considerations about open access and the wide availability of different sorts of content from different sources – non-economic arguments that play an important role in this context – often are not part of the competition analysis, or only to a very limited degree. Arguably, mandating access on a formal legal basis and by way of a constitutional law-making process is the preferable route to strike the needed balance.

A different question altogether is whether mandating access to a particular DRM standard is the solution to the problem of technical market segmentation as far as DRM is concerned. One aspect that is worth being considered in this context is that enforcing access to a particular DRM standard could further re-enforce the dominance of the FairPlay standard and discourage competitors from designing technically more advanced, and more consumer-friendly solutions. Mandated access regimes can be very questionable from the standpoint of static and dynamic efficiencies and consumer welfare. Access obligations could hamper investment by cutting down incentives to invest in technical innovation and improvement, and by discouraging other enterprises from doing so. As a consequence, mandated access could further strengthen the market position of a particular standard rather than remedying it.

Is it paramount for consumers that FairPlay licences its DRM standard to competitors? What probably matters most from the perspective of consumers is that their choice for a particular device does not tie them to one particular service only, but that they are able to switch between different services (see Duft et al. 2005). To this extent, it is the compatibility of the portable player that matters and that should be guaranteed. To realise this goal, one could think of rules obliging controllers of DRM technology to license their technology to the producers of portable players at reasonable and non-discriminatory terms, similar to the rules that now already apply for conditional access controllers in digital broadcasting. One could also think of an obligation to conclude some form of interoperability agreement, e.g. following the model of simulcrypt agreements or common interface solutions that have been propagated for digital broadcasting. Speaking for myself, I would rather purchase a portable device that supports several different DRM standards than download music only from download services that support FairPlay. Am I being irrational here?

Bottom line
The arguments that the French competition authority used do not seem unique to the French music sector. In other European countries, portable music players are also by far not the only way to access music files from online download services, several download services are in competition and different portable music players are available to process their range of music. Another question could be whether the adaptation of the iPod to play additional DRM standards is compatible with national law. Fact is that strict scrutiny must be applied before granting access requests of competitors to a particular DRM standard. The decision confirms standing jurisdiction of the European Court of Justice and national courts that forcing undertakings to grant rivals access to their own resources must remain the absolute exception, and is eventually not even a means to achieve market competition and consumer welfare. Instead, solutions that support the compatibility of consumer devices are probably a more viable route to consider. Useful inspirations could be derived from the regulation of conditional access in digital broadcasting.

Sources
  • Bangeman, Eric (2004): Apple responds to RealNetworks’ FairPlay hack, http://arstechnica.com/news.ars/post/20040729-4051.html (last visited at 23 October 2005)
  • Conseil de la concurrence (2004): Décision du 9 novembre 2004 relative à des pratiques mises en œuvre par la société Apple Computer, Inc. Dans les secteurs du téléchargment de musique sur Internet et des baladeurs numériques, Case No. 04-D-54
  • Dufft, Nicole et al. (2005): Digital music usage and DRM. Results from an European consumer survey, Berlin, May 2005; http://www.indicare.org/tiki-download_file.php?fileId=110
  • European Commission (1987): Commission Decision of 29 July 1987 relating to a proceeding under Article 86 of the EEC Treaty, (Case IV/32.279 – BBI/Boosey & Hawkes), 9 October 1987, OJ L 286, p. 36
  • European Court of Justice (1998): Judgment of the Court of 26 November 1998, Oscar Bronner GmbH & Co. KG v Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG, Mediaprint Zeitungsvertriebsgesellschaft mbH & Co. KG and Mediaprint Anzeigengesellschaft mbH & Co. KG, Reference for a preliminary ruling: Oberlandesgericht Wien – Austria, Case C-7/97, European Court reports 1998, p. I-7791
  • European Court of Justice (1995): Judgment of the Court of 6 April 1995, Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v Commission of the European Communities, Joined cases C-241/91 P and C-242/91 P, European Court reports 1995, p. I-743
  • Furse, M. (1995): The Essential Facilities Doctrine in Community Law. European Competition Law Review 469, 473
  • Helberger, Natali (2005): Controlling access to content – Regulating conditional access in digital broadcasting. Kluwer International: Den Haag
  • Lévêque, François (2005): Innovation, leveraging and essential facilities: Interoperability licensing in the EU Microsoft case, Forthcoming in World Competition; pre-print available at http://www.cerna.ensmp.fr/Documents/FL-Ms-WorldCompetition.pdf
  • Mazziotti, Guiseppe (2005): Did Apple’s refusal to licence proprietary information enabling interoperability with its iPod music player constitute an abuse under Article 82 of the EC Treaty? eScholarship Repository, University of California, http://repositories.cdlib.org/bclt/lts/5
  • RealNetworks (2004): Press release http://www.RealNetworks.com/company/press/releases/2004/freedom_choice.html (last visited on 23 October 2005)

For a more detailed introduction into the Essential Facilities Doctrine see: P. Areeda (1990): Essential Facilities: An epithet in need of limiting principles. 58 (1990) Antitrust Law Journal 841, 852-853pp; J. Temple Lang (1994): Defining legitimate competition: Companies’ duties to supply competitors, and access to essential facilities. 18 (1994) Fordham International Law Journal 441, 478-483pp; D. McGowan (1996): Regulating competition in the information age: Computer software as an essential facility under the Treshman Act. 18 (1996) Hastings Communications & Entertainment Law Journal 771, 805-806pp

Acknowledgement
Parts of this text are adapted from a recently published book by the author (Helberger 2005)

About the author: Dr. Natali Helberger is senior project researcher at the Institute for Information Law, University of Amsterdam, and managing legal partner in the INDICARE project. Dr. Helberger specialises in information law, technical control of information, the interface between law and technology, a between media, intellectual property and telecommunications law. Presently, she is staying as visiting scholar at the University of California, Berkeley. Contact: helberger@ivir.nl

Status: first posted 28/10/05; licensed under Creative Commons
URL: http://www.indicare.org/tiki-read_article.php?articleId=150