iTunes inquiry focuses on price fixing
Apple, Amazon's Daily Deal program central to investigationNEW YORK/DENVER -- Seeking information on possible price fixing in the digital music marketplace, the U.S. Department of Justice contacted the legal departments of the major record labels as part of an initial inquiry into Apple, sources tell Billboard.
The DOJ also spoke with a number of digital music services.
The inquiry into iTunes was first reported by the New York Times. That story said the DOJ was examining allegations that Apple had strong-armed labels from participating in rival music seller Amazon's Daily Deal program.
Amazon's Daily Deal launched in June 2008, but it became the subject of iTunes' ire last summer when the Seattle-based merchant pushed for labels to make new releases available on the Monday before the Tuesday "street date" of official release.
In September, iTunes began grumbling about that promotion to the major labels, but the big pushback began when Island placed Mariah Carey's "Memoirs of an Imperfect Angel" in the promotion a day before its September 29, 2009, release. In January, iTunes extended its vocal displeasure about Amazon to the independent community when Vampire Weekend's "Contra" was the Daily Deal on January 11, selling at $3.99 a day before its official street date.
Earlier this month, according to sources, the DOJ reached out to the majors to learn whether Apple's clout in the marketplace could affect pricing. Since the featured album in Amazon's Daily Deal usually sells for the low prices of $3.99-$5.99, as opposed to the almost standard $9.99 for digital albums, any attempt to discourage labels from participating in the Amazon promotion might be construed as price fixing, sources say.
The DOJ "cares a lot when monopolies do things that keeps prices high," a source familiar with the DOJ conversations says. "The conversation with Justice has nothing to do with Amazon getting (music) early. It has everything to do with whether iTunes is trying to control pricing."
While iTunes has significant market share, it's not a monopoly. Overall, iTunes had 26.7 percent U.S. market share last year, which translates into 65.5 percent of digital market share, Billboard estimates. For a la carte download sales, its U.S. presence is overwhelming, with an estimated 93 percent market share.
In contrast, Amazon's MP3 store had an overall 1.3 percent market share, which translates into about 5 percent of U.S. market share for a la carte downloads, while Walmart's MP3 store has an estimated 0.17 percent of overall market share, or 0.6 percent of downloads.
Earlier this month, according to press reports, the Federal Trade Commission and the DOJ were considering investigating the rules Apple places on iPhone application developers, specifically those rules requiring developers to use the Apple programing tools rather than those from third parties. Doing so would mean apps created for the iPhone could work only on the iPhone, and developers would have to create separate apps for other devices.
The DOJ reacted similarly to Microsoft's dominance in the late '90s, claiming the company was using its Windows operating system to get an unfair advantage in the browser wars.
Apple's market capitalization reached $222 billion this month, overtaking rival Microsoft to become the world's largest technology firm and the second-largest company of any kind in the United States behind Exxon-Mobil.
So far the DOJ has asked only to speak with the legal departments of the record labels, and hasn't sought any documentation on the topic at hand.
In the mid- and late '90s, when the FTC explored the music industry's involvement in price fixing, the inquiry blossomed into a full-scale investigation in which numerous label sales and distribution executives were deposed. In addition, the FTC demanded and received what at the time was described as "tractor-trailer" loads of documentation, including e-mails.
If the iTunes inquiry moves to the investigation stage, the DOJ might have a hard time getting documentation. According to sources, practically all iTunes communications on the topic have been verbal, and iTunes executives haven't detailed their position to all the labels.
Apple, Amazon, the DOJ and the major labels all declined to comment for this story. Digital retailer eMusic confirmed that it had received a phone call from a federal regulator but declined further comment.