Apple Computer Inc. (AAPL) faces a serious challenge in France as lawmakers move to sever the umbilical cord between its iPod music player and iTunes online store — threatening its lucrative hold on both markets.
Amendments to an online copyright bill, adopted early Friday, would give rivals access to the hitherto-exclusive file formats at the heart of Apple's music business model, as well as Sony Corp.'s (SNE) Walkman players and Connect store.
Thanks to the massive success of the iPod models, which account for two out of every three music players sold worldwide, iTunes has become the global leader in online music sales. The iPod is currently designed not to play music from rival services.
Companies that refuse to share all essential information with any rival that requests it would be ordered to do so by a judge, under threat of fines.
The draft law could force Apple to let French iPod users buy their music from download sites other than iTunes. Owners of other music players would also be allowed to buy songs from iTunes France.
"Without guaranteed interoperability, we run a major risk of captive client bases and an anti-competitive situation, with the consumer held hostage as a result," read the explanatory note accompanying one of the key amendments.
Lawmakers in the lower house voted to approve the amended text early Friday and will hold a further formal vote on Tuesday before sending the bill to the Senate for its final reading.
Although the draft law would also apply to Sony, "the implication is most serious for Apple" because of the phenomenal market penetration of the iPod and iTunes, said Roger Kay of U.S.-based research firm Endpoint Technologies Associates.
Apple spokesman Steve Dowling declined to comment on the law or say whether it could force the company to withdraw the iPod or iTunes from the French market. Sony also refused to comment.
Although iTunes was initially driven by iPod sales, some analysts say the two offerings now reinforce each other. Apple's large online music catalog, the result of its superior bargaining power, also boosts the iPod's appeal. Breaking the exclusive link removes both advantages.
Critics of the draft law say legislators have no business forcing Apple to share its proprietary format, arguing that most customers know about its limitations when they choose to buy an iPod. But consumer groups argue that the only way to give customers real choice is to end the restrictions.
"It's an essential condition for consumers and for the market itself," said Julien Dourgnon, a spokesman for UFC-Que Choisir, France's main consumer organization.
UFC has already filed a lawsuit in French courts, attacking Apple's exclusive music format as a form of anticompetitive behavior.
"It's only by resisting interoperability that Apple is able to keep this dominant position," Dourgnon said. "Once there's interoperability, it's over."
If the draft law goes through in its current form, experts say, Apple could have three broad courses of action from which to choose.
The company could look for technical solutions to comply with the new law in France while maintaining its format exclusivity elsewhere. Sales from iTunes sites are already restricted to local markets using credit card details.
But preventing newly interoperable iPods from being used outside the "walled garden" would be much harder — although shipping them with French-only software could help.
Alternatively, Apple could follow the example set by Microsoft Corp. (MSFT) in its standoff with EU antitrust authorities: Drag its feet over compliance and wait to be sued.
Court proceedings are long, damages relatively light and class actions impossible in France. Apple might calculate that its iPod and iTunes profits dwarf any potential penalties.
Finally, Apple could be forced to withdraw from Europe's third-largest music download market — or threaten to do so while seeking a change in the law.
"They may have to bluff initially by pulling product off the market and making everybody uncomfortable," Endpoint's Kay said.
But Apple's transformation into a major force in digital entertainment may ultimately lead to antitrust challenges elsewhere, including the United States, Kay said.
In that case, the French move will turn out to have been just the start of something bigger, he added. "Creating an open version of the iPod ecosystem is what everybody in the world except Apple would like."