Will Apple Pay Consumers $1 Billion For Deleting Their Music?


Apple Inc. AAPL is currently embroiled in another antitrust case, this time involving the iPod and its inability to play music from competing services.

The case might have seemed strange to happy customers, but new evidence shows that Apple may have actually deleted competing music files from users' iPods.

"It sounds damning initially," Kaiser Wahab, an attorney and partner at Wahab & Medenica LLC, told Benzinga. "It's very easy to say, 'Okay, it was deliberate, therefore it was evil.'"

Wahab (who has represented Fortune 500 companies in the areas of technology, media, brand and intellectual property) said that the iPod is a device that is "imminently hackable." He said that Apple was very concerned about security at the time, so there are a "lot of reasonable explanations as to why they did this."

"The plaintiffs' side is introducing e-mails where Jobs was railing against RealNetworks at the time," said Wahab. "They're trying to paint Jobs as a guy who hates competition, [but] you can read those e-mails in another way. You can read those e-mails as, 'Jobs is very upset that people are trying to mess with this machine that they've spent a great deal of time trying to make perfect and it's going to hurt the consumer more so because these devices are going to respond in ways and do things that people don't anticipate.'"

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'Anti-Competitive Environment'

Plaintiffs claim that Apple overcharged its customers by nearly $350 million. According to The Guardian, antitrust laws could force Apple to pay three times that amount, creating a $1 billion loss for the Mac maker.

"Steve Jobs was always saying, 'Hey, we don't want other vendors connecting to our devices,'" Craig Delsack, a business, media and tech attorney in New York City, told Benzinga. "I think even back in 2004 he was trying to go after RealNetworks."

At the time RealNetworks hoped to universalize music playback with Harmony, a service that converted various music files to different formats. This would theoretically allow those files to be played on multiple devices.

"What Apple was objecting to was encoding it to the equivalent of the AAC-type of protection with the digital rights management built into it," said Delsack. "Apple basically said, 'We're going to crush all these people because we want to basically control the user experience from the delivery of the content, purchase of the content and then putting it onto the device player.'"

This differed from other players in the industry, which were more open to multiple music formats.

"I think the fact that Steve Jobs was really going after these other companies did create an anti-competitive environment," Delsack added. "Unfortunately, we know that's part of the fabric of Steve Jobs from some of the other lawsuits."

One of those suits involved Apple's plan to collude with book publishers to maintain higher e-book prices.

Consumer Expectations

Delsack said that another issue for Apple is consumer expectations. He said he personally could not recall his own expectation when he bought an iPod, but he vaguely remembers hearing Apple co-founder Steve Jobs say that the device could hold all of the user's music.

Indeed, when the iPod Nano was announced, Jobs went to great lengths to clarify how much smaller it was than every other device on the market. However, he made no mention of the fact that it may only play music ripped from CDs or files that are purchased from the iTunes Store.

"I would have never bought a device that I could only consume [iTunes] content on," said Delsack.

Having doubts about the plaintiffs' claim, Wahab (who, in addition to being an attorney, also invests in Apple) polled his clients. None of them remember having trouble loading music -- even non-iTunes content -- onto their iPods.

"This is not a nuisance lawsuit," said Wahab. "I definitely am not calling this for Apple and I am not suggesting Apple can sail out of here. I think the bigger issue for Apple is the shareholders. I think Apple is in a lot of trouble because of competition."

Is The Brand At Risk?

Wahab is more concerned about the brand than anything else. He fears that it will take a hit as more of these complaints come to light.

"Apple is going to be okay," he said. "Even if they lose, their market cap can handle it. It's just the cost of doing business. I think the bigger issue is their brand. How much is their brand going to take?"

Delsack (who has no position in Apple) has noticed that the Apple Store on Broadway no longer draws the crowds that it did in the past. He said that while consumers once lined up to check out new devices, they now only line up to purchase new items -- mainly new iPhones.

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.

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Posted In: Top StoriesExclusivesTechAppleCraig DelsackipodKaiser Wahabnyccounsel.comWahab & Medenica LLC
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