Tags: apple | economist | ipod | itunes

Apple Seen by Economist Putting Early iPod Users in Costly Bind

Tuesday, 09 December 2014 08:35 AM

Once upon a time, Apple Inc. forced customers to give up their iTunes downloads if they switched from the iPod to another digital music player or burn all their songs onto CDs and then re-load them.

Monday, a Stanford University economist put a price on those transactions to justify consumers’ demand for more than $1 billion in damages at a jury trial over claims that Apple tried to maintain an illegal monopoly on digital music. The consumers allege that Apple, facing competition a decade ago, changed its technology so that songs it sold worked only on an iPod.

Consumers who bought rival music players, like Microsoft Inc.’s Zune, would incur “costs” if they wanted to keep their music, Roger Noll, the Stanford professor, testified in federal court in Oakland, California. They would have to burn it onto a compact disc in an unencrypted format and then load the music back onto their music players — or buy the music all over again, he said.

“The key point to this is that all the alternatives had costs,” Noll said. This cost would tend to “lock in” consumers to iPods, discouraging them from switching to rival players, Noll said. As a result, consumers would be less “price sensitive” to iPods and therefore Apple could charge more for them, he said.

The consumers’ lawsuit, initially filed in 2005, took until this year get to trial. Jurors began hearing testimony last week and the trial is expected to wrap up this week.

Retailers, Resellers

Attorneys representing as many as 8 million consumers and 500 retailers and resellers who bought iPods from 2006 to 2009 claim Apple modified iTunes software so music downloaded with software made by competitor RealNetworks Inc. couldn’t be played.

Noll said Apple’s introduction of iTunes 7.0, which blocked downloads by RealNetworks, raised the prices of consumer iPods by 7.45 percent, or $16.32. This cost consumers $195 million, he said. Noll based these figures on an elaborate statistical analysis of iPod prices and market factors.

The economist said Apple overcharged resellers for iPods by 2.38 percent for a total of $149 million. Under federal antitrust law, a jury’s award of damages could be tripled.

Apple has argued that Noll’s theory is “implausible,” saying in a court filing that RealNetworks, which isn’t a party in the case, was a minor player and there’s no evidence consumers were locked into buying an iPod.

Technological Changes

Apple’s technological changes to iTunes were genuine product improvements that enhanced the iPod, Apple senior executives testified last week.

Under cross-examination yesterday, Noll conceded that Apple’s actions probably also “locked out” some potential customers by making iPods incompatible with music downloaded from RealNetworks. Potential customers who had downloaded music from RealNetworks would be disinclined to buy iPods, he said.

He testified that the “lock-out” effect would be smaller than the “lock-in” effect, given the relatively small number of people who downloaded music from RealNetworks, compared to the millions who downloaded from iTunes.

As Noll testified about the alleged costs of Apple’s dominance over digital music, a dispute about whether the case should be allowed to continue hung over the trial.

Lead Plaintiff

After testimony finished for the day, U.S. District Judge Yvonne Gonzalez Rogers declined Apple’s request to throw out the case for lack of a qualified lead plaintiff.

Apple, based in Cupertino, California, said dismissal of the case is warranted because it discovered during the trial that the single named plaintiff in the class-action lawsuit — whose claims are meant to represent what happened to other iPod customers — never directly purchased any of the devices covered by the complaint.

Rogers said she would allow lawyers for the consumers to name a different iPod consumer as the lead plaintiff and she retains jurisdiction over the case.

The judge said information that emerged at trial convinced her that plaintiff Marianna Rosen, a South Orange, New Jersey, resident who bought iPods for herself and her son in 2008 using a credit card issued by the law firm of her then-husband, wasn’t an adequate representative of the class of iPod buyers covered by the case.

While Rogers said she was troubled by Rosen’s belated disclosures about her purchases and her lawyers’ failure to sufficiently vet their plaintiff, the judge said removing her doesn’t affect or diminish the interests of the 8 million other potential class members who may be eligible for damages in the case and whose claims she has a duty to protect.

“The claims of the unnamed class members remain a live controversy,” she said after the jury left for the day.

Rogers ordered the consumer lawyers to provide Apple yesterday with information about potential substitute plaintiffs and their iPod purchases. A hearing will be held in the coming days outside the jury’s presence for Apple to question the proposed new lead plaintiffs, she said.

The case is the Apple iPod iTunes Antitrust Litigation, 05-00037, U.S. District Court, Northern District of California (Oakland).

© Copyright 2020 Bloomberg News. All rights reserved.

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Once upon a time, Apple Inc. forced customers to give up their iTunes downloads if they switched from the iPod to another digital music player or burn all their songs onto CDs and then re-load them.
apple, economist, ipod, itunes
Tuesday, 09 December 2014 08:35 AM
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