Meet the Beatles on iTunes -- and nowhere else?

As widely rumored and confirmed ahead of time by the Wall Street Journal, the Beatles debuted on iTunes today in an exclusive distribution deal. I contacted Apple, Apple Corps. and EMI about exclusivity and heard back from Apple early this afternoon. "The Beatles will be exclusively available on iTunes, with exclusivity expiring in 2011," said Apple spokesperson Tom Neumayr. Uh-oh. Exclusivity could bring Apple under fire for violating antitrust laws. The Beatles deal is representative of exclusives available only from iTunes.

Depending on the analyst firm doing the counting, Apple's market share for U.S. digital downloads ranges from more than 70 percent to about 90 percent. Meanwhile, Apple's command of the portable music player market is 75 percent or more, again depending on who's doing the counting. Apple's market-leading position -- not just in the United States -- means that antitrust enforcers apply different rules, so to speak, to Apple compared to its competitors. One thing they'll watch for: Actions that forestall competition or compel consumers to pay higher prices for music.

Exclusive distribution from a market leading -- some would call dominating -- position is a potential problem for Apple. Three quick reasons viewed from the 1890 Sherman Act and jurisprudence based on precedent-defining antitrust cases:

1. Exclusive distribution discourages -- or prevents -- competition, causing consumers harm. They don't receive the many benefits of competition, among them better pricing.

2. The exclusive distributor is in position to set prices at a higher rate. Consumers have no other choice.

3. In the case of Apple, with arguable monopolies in two markets, exclusive distribution is leverage into other markets and could create what antitrust enforcers call a "barrier to entry" for competitors. That position not only harms consumers and competitors but can stifle innovation.

Exclusivity Doesn't Start with the Beatles

Monopolies aren't illegal in the United States. But abuse of monopoly power is. I covered Microsoft's U.S. antitrust trial from the late 1990s through the 2001-02 settlement and beyond. Nearly all the antitrust academics and lawyers I consulted agreed on one point: Microsoft's exclusive distribution deals for Internet Explorer, which shut out rival Netscape, precipitated the case; no exclusive deals, likely no antitrust prosecution. 

Already several governments, including South Korea and the United States, are investigating Apple's competitive practices. The European Union has eased off a separate antitrust investigation. Exclusive Beatles distribution could add fuel to the fire. It's not so much the Beatles but what the distribution deal represents -- Apple's ability to affect digital download pricing and distribution.

Apple could argue that exclusive distribution of one band's music should hardly be called monopoly abuse. But as aforementioned, the Beatles deal is representative of Apple's ability to offer exclusive deals from an overwhelming market commanding position. The iTunes Store offers a large amount of exclusive content, much of it for higher pricing than some other content at the store or from competitors. For example, the iTunes version of Rihanna album "Loud" contains an album-only track not available from AmazonMP3 store or on the physical CD. Rihanna fans wanting the song must buy from iTunes and pay for the whole album. Looked at one way, there is consumer-friendly competition, because AmazonMP3 offers the digital album for $7.99; Apple charges $9.99. But exclusive distribution for a song available only on the album means some buyers are compelled to pay more. This isn't an isolated example. This kind of exclusive is commonplace at Apple's music store. Is iTunes just a better-run music distributor than AmazonMP3, or is monopoly leverage at work to get exclusive content?

Something else: Then there are the partners making the pricing decisions to consider. Apple doesn't have sole say in music pricing; the company licenses the content. Music labels have monopolies over music content and pricing. Antitrust enforcers are particularly sensitive to monopolies controlling prices or distribution -- Apple and music labels like EMI. Is that the situation here? The Beatles distribution deal is reason to ask the question. The answering is up to trustbusters, assuming they choose to investigate.

Microsoft Antitrust Comparisons

There are several striking similarities between Apple's and Microsoft's monopoly positions and how trustbusters might view them. The U.S. Justice Department narrowly defined Microsoft's core monopoly as PC operating systems. Apple might argue that it has no monopoly since people can get music other places, such as CDs. The last number I saw on Apple's U.S. music distribution market share -- from May -- was about 27 percent. There's hardly any monopoly in that. But as much as 90 percent in digital downloads market share most certainly is a monopoly, using Microsoft's 1990s Windows dominance as measure.

Microsoft used its monopoly position to reset the price of a Web browser to zero. Netscape charged for its browser and couldn't compete with free. By integrating Internet Explorer into Windows, Microsoft made distribution of its free browser easier to get than downloading Netscape over slow dial-up Net connections. Arguably, IE-to-Windows integration eventually raised browser pricing, since the operating system with browser cost more than what Netscape charged for its stand-alone Communicator.

Exclusive distribution allows Apple, Apple Corps. and EMI to set the price for Beatles digital downloads from iTunes' monopoly position. For Beatles downloads, iTunes store charges $1.29 for singles, $12.99 for albums and $19.99 for so-called double albums (there arguably is no such thing as double for a non-physical product). The pricing is higher than most music sold from iTunes but by no means overly high. The albums are comparably priced to CDs sold by Amazon. However, there is no AmazonMP3 store option to offer competitive pricing. To reiterate, Apple could argue there is no problem at all, because many more Beatles CDs are available than digital downloads and other purchasing options give Apple no monopoly at all. But as aforementioned, much depends on how narrowly trustbusters might choose to define music distribution. They chose a narrow market for Microsoft.

Wrapping up, to Apple, Apple Corps. and EMI, I asked:

• Is the Beatles digital download catalog exclusive to iTunes?
• If so, for how long?
• If not, what other services will be able to distribute the music, and how soon?
• Are the songs being distributed DRM-free, meaning iTunes Plus, like other music in the store?

Neumayr answered the first and second (without specific end date) questions and confirmed that the Beatles music is DRM-free.

Apple marketing describes the Beatles as "the band that changed everything." How true for Apple if exclusive distribution draws antitrust fire.