No abuse of market dominance by Apple according to the French Competition Council

Publié le 26/12/2004 par Didier Deneuter

On the 9th of November 2004, the French Competition Council dismissed a complaint put by VirginMega.fr against its competitor Apple for alleged abuse of market dominance. The complaint was based on the refusal by Apple to grant a license on its Fairplay DRM system. The facts Apple commercialises digital walkmans known under the name iPod.…

On the 9th of November 2004, the French Competition Council dismissed a complaint put by VirginMega.fr against its competitor Apple for alleged abuse of market dominance. The complaint was based on the refusal by Apple to grant a license on its Fairplay DRM system.

The facts

Apple commercialises digital walkmans known under the name iPod. These walkmans are only compatible with Apple’s digital rights management system (DRM), called Fairplay. This DRM allows in particular downloads from Apple’s music downloading platform iTunes to be played directly on the iPods.

VirginMega.fr, on the other hand, has chosen for a Microsoft DRM that is not iPod-compatible. This incompatibility implies that downloads from the latter company’s website cannot be transferred directly to the iPod.

The success of iPod made VirginMega.fr contact Apple in order to obtain a license on the Fairplay DRM. However, as it already did with its other competitors, Apple refused to grant such license.

Due to this refusal, VirginMega.fr filed a complaint before the French Competition Council on the 28th June of 2004 for alleged abuse of dominant position. VirginMega.fr was in particular of the opinion that access to the Fairplay DRM is indispensable for the activity of on-line music providers, the DRM being an essential resource and that the refusal to license constituting an abuse of dominant position in the relevant market for digital hard disk walkmans.

Before discussing the content of the Council Decision, some aspects concerning DRM and the applicable Competition law are highlighted hereafter.

DRM: technical and legal aspects

Both parties in the present case deliver on-line music download services.

In general, music downloading relies on the technology of compression/decompression (used to compress the music for fast delivery over the Internet and decompresses it for playback) and encryption/decryption (providing security for digital downloads by modifying a digital file, so that it can be read only with the decrypting software). Another technology, which was at stake in the present case and essential as well for the downloading of music, is the aforesaid DRM.

DRM technology and software manages the process of transferring audio files from their source to their recipients, and in particular the transfer of a particular song for downloading, hereby verifying its receipt and creating a record for the transaction. Since encryption is used by most DRM systems to prevent unauthorized access to the content, the DRM technology must be interoperable with the encryption technology.

DRM systems often include a whole of technological measures aiming at preventing unauthorized access to contents of, for instance, an online music download platform. Within the framework of counterfeiting, it occurs, however, that technological measures are removed or circumvented without the authorization of their owner. In order to prevent such abuse, a legal protection framework has been established. With regards to the European Community law, one can refer in particular to the following instruments:

1. Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs states that any act of putting into circulation, or the possession for commercial purposes of, any means the sole intended purpose of which is to facilitate the unauthorized removal or circumvention of any technical device which may have been applied to protect a computer program.
2. Directive 2001/29/EC of 22 May 2001 on the harmonization of certain aspects of copyright and related rights in the information society states that Member States shall provide adequate legal protection against the circumvention of any effective technological measures, which the person concerned carries out in the knowledge, or with reasonable grounds to know, that he or she is pursuing that objective and the manufacture, import, distribution, sale, rental, advertisement for sale or rental, or possession for commercial purposes of devices, products or components or the provision of services which are promoted, advertised or marketed for the purpose of circumvention of, or have only a limited commercially significant purpose or use other than to circumvent, or are primarily designed, produced, adapted or performed for the purpose of enabling or facilitating the circumvention of, any effective technological measures.

In order to be (directly) applicable and to offer the envisaged protection against unauthorized circumvention and removal of technological measures, these Directives are to be transposed into the national legislations of the EC – Member States. However, as in a number of other Member States, this is not the case yet in France for Directive 2001/29.

Within the field of the French intellectual property law, technological measures therefore benefit merely from the partial protection offered by the computer program legislation. This means in particular that protection for DRM systems is possible against the commercialisation and keeping of the means facilitating the removal or circumvention of technological measures, but not against the circumvention act as such.

Relevant aspects of Competition Law

Some particular aspects of the Competition Law important for the Decision of the French Competition Council are addressed hereafter.

(i).- The relevant market

As mentioned above, the market of downloadable music was at stake in the present case. In this regard, one can wander whether this market is to be regarded as a separate market, or does it form part of the larger market for recorded music? With other words, is downloadable music substitutable for music distributed on physical carriers (such as CD’s)?

These questions are important for the applicability of the competition rules. The concept of the ‘relevant market’ is indeed an essential element in the assessment of whether competition rules have been disregarded or not. The exact delimitation of the market is often of great importance for the outcome of a competition law case. The extent, into which a market is defined in a narrower or larger way, can have its effects on the qualification of a dominant position in that market.

In this regard, one can refer to the AOL/Time Warner case, in which the European Commission recognized the upcoming relevant market for online music activities, such as the downloading and streaming of music files. The Commission stated in particular that there are a number of significant differences, which make downloadable music an entirely different business model, and a separate market.

(ii).- The essential facilities doctrine

Since Apple refused to grant a license on its DRM, and taking into account the complaint of VirginMega.fr, one could question as to which extent a market operator, who refuses to grant access to a (technological) component of a network or its contents, abuses its dominant position following Article 82 of the EC-Treaty.

This question relates in particular to the upcoming essential facilities-doctrine, as introduced by the European Court of Justice in the cases Magill , Bronner and IMS Health.

In the Bronner case, to which reference was made in IMS Health, the Court stated that, in order to determine whether a product or service is indispensable for enabling an undertaking to carry on business in a particular market, it must be determined whether there are products or services which constitute alternative solutions, even if they are less advantageous, and whether there are technical, legal or economic obstacles capable of making it impossible or at least unreasonably difficult for any undertaking seeking to operate in the market to create, possibly in cooperation with other operators, the alternative products or services. In order to accept the existence of economic obstacles, it must be established, at the very least, that the creation of those products or services is not economically viable for production on a scale comparable to that of the undertaking which controls the existing product or service.

The Council Decision

In its Decision, the French Competition Council considered both the applicable French and (above mentioned) European Community case law, and came to the following conclusions:

1. With respect to the relevant market and the position of Apple on that market, the Council acknowledged that it is not excluded that Apple, at the moment of the complaint, retains a dominant position on the market of walkmans, on the one hand, and the market of music downloading, on the other hand.In this regard, the Council, reiterating that there has to be a causal link between the dominant position and the abuse, stated that there is no proof of such a causal link between the state of competition of the music downloading market and the possible dominant position of Apple in the market of hard disk walkmans.
2. According to the Council, no proof was established sufficiently that the refusal to grant the license was not justified, an element required for qualifying this refusal as an abuse.
3. The proof of the access to an essential facility to be of an indispensable nature has neither been established, due to the fact that downloaded music is only transferred to a walkman in a minority of cases, the incompatibility between the both DRMs can be worked around by burning to CD’s and, in France, many digital walkmans are compatible with the VirginMega platform.Moreover, the Council concluded that, taking into account the elements provided for in this case, it is excluded that the Fairplay DRM can be considered, in the present state of the market, to be an essential facility for the legal, on-line music download platforms.
4. The risk of elimination of competition appears to be very small, since there are, at present (and expected to be in the future), a considerable number of competitors active in the market concerned.
5. VirginMega.fr has not exposed its willingness to commercialise a product or a service that is new and not intended to be commercialised by Apple, and for which a license on the Fairplay DRM is prerequisite.

Taking into account these elements, the Competition Council came to the global conclusion that the factors, leading to the qualification of an abuse of a dominant position, are not reunited in the present case and that the rules ensuring the free competition are not affected.

Since the Council recognized that it is possible that Apple holds a dominant position in the distinctive markets of walkmans and the legal music downloading, it is at present not excluded that similar complaints will be made before a national competition authority of a Member State where Apple is active. In this context, one can refer to the ‘invitation’ of the Competition Council underlining that its decision should not prevent the operators in these markets to bring new elements before the Council at a later stage.

In the meanwhile, given the problem of the lack of interoperability between DRMs, one can already have a look to the work of the Digital Living Network Alliance. This association, counting more than a hundred of firms active in the digital sector, is envisaging the adoption of a universal and standard DRM. Cases as addressed above can therefore be avoided in the future, that is … if Apple joins the Alliance.