Apple's Not-So Excellent European Adventure

For Apple, however, expanding overseas has never been an easy task. Its high-end products aren't well-suited for tackling emerging markets, and it has taken its share of lumps in moving into markets such as Japan.

Still, the maker of the iPod, the iPhone and the Mac now gets about 40 percent of its revenue from outside the U.S., a percentage almost certain to grow over time.

Regulatory Issues

Today, however, it's Europe more than anywhere else in the world where Apple finds itself with its hands full on both the regulatory and business fronts.

The iTunes Music Store is in the crosshairs of a European Commission panel studying pricing equity across the continent, and in some jurisdictions, regulators are pushing to break what they say is the iTunes-iPod monopoly by forcing Apple to make its players and its downloaded music more interoperable.

Finally, Apple has yet to name a European carrier for its new iPhone, a surprising fact given that the company plans to launch the device in Europe before the end of September.

Just how critical each issue could be to Apple is up for debate, but it's clear that Apple needs to find ways to address its European issues before too long.

The Price Is ... Different

Earlier this year, the European Commission confirmed that it was looking into the issue of whether the iTunes Music Store discriminates against some consumers in Europe by charging more in some jurisdictions than in others.

The inquiry was sparked by complaints from a UK consumer group that argues that British downloaders pay more for songs from the Apple online music store than their counterparts in many countries on the European continent. UK users typically pay the equivalent of 99 US cents per song, while in some European countries, songs can be purchased for 79 cents.

This may be a case of guilt by association for Apple, since the European Commission has said that its main target is record companies that sell music for different prices across Europe, Yankee Group analyst Mike Goodman told MacNewsWorld.

"Apple is somewhat caught in the middle on pricing," Goodman said, noting that Apple has publicly called for labels to be more flexible on single-song pricing around the world, including in the U.S. With profit margins of a few cents on songs sold on iTunes already, Apple may not be in a position to underwrite discounts to satisfy regulators either, he added.

In fact, Apple has said that it would be willing to create a single storefront for all of Europe, but has been told by music publishers and labels that doing so creates copyright issues and other concerns.

Still, Apple is on notice from the EC that the pricing menu is being looked into, and the commission holds the hammer in the form of potential daily fines of up to 10 percent of European revenue. Apple need only ask rival Microsoft (Nasdaq: MSFT) to know that regulators aren't afraid of leveling stiff penalties when they think their rules are being broken.

Playing Monopoly

Meanwhile, the very foundation of Apple's recent success -- the tying together of the iPod and iTunes -- is under fire in some European locales.

Regulators in France, Norway and Germany are arguing that Apple's FairPlay digital rights management (DRM) software is illegal in their jurisdictions because is essentially forces consumers who want to play music from iTunes to buy an iPod -- and vice versa.

A top Norwegian consumer group called the iTunes-iPod link "an illegal lock-in" that forces consumers' hands by "technically blocking interoperability."

Apple may have already begun to address those concerns, though the question remains whether it is moving fast enough to avoid official sanctions. In April, Apple unveiled the option to buy music from EMI through iTunes that is stripped of the FairPlay DRM, allowing users to copy it more often, transfer it to more devices and play the music on some non-Apple portable music players.

Apple has hailed the move as the beginning of the end of restrictive DRM -- and as with pricing, Apple has said it's the labels who insist on keeping such restrictions in place -- and CEO Steve Jobs predicted as much as half of the iTunes library could be available DRM-free by the end of 2007.

Protecting Material

If regulators in Europe decide the steps don't go far enough, Apple is unlikely to cave to demands to unlock all songs, Goodman noted, in part because record labels would rebel and in part because doing so in some jurisdictions would raise expectations for freely exchangeable music around the world.

"Apple needs to protect the copyrighted material of its music label partners and its own place in the market, and it will move carefully toward opening up its site," Goodman said. "It remains to be seen whether the pace of change will be fast enough for regulators in Europe."

Apple has said that legislation to open up iTunes would encourage unauthorized song-swapping and create a "state-sponsored culture of piracy," and has been backed by some U.S. technology trade groups who argue that regulators will discourage technological innovation by forcing Apple to turn over the fruits of its labors to all. It may be rendering the question moot, though, by nudging the music industry toward a more open approach to digital distribution.

A Different iPhone?

With the iPhone, Apple believes it has a revolutionary product of which it will sell as many as 10 million during the next year or so. Reaching that goal will require the iPhone to be a success in Europe.

That may prove tricky. While Apple was able to partner with AT&T (NYSE: T) to provide iPhone service to consumers anywhere in the U.S., duplicating that coverage in Europe will be all but impossible, noted Forrester Research analyst Niek van Veen. "There is no single European carrier that covers the entire continent and the UK," van Veen told MacNewsWorld.

Apple will soon announce who its European carrier or carriers will be, the iPhone maker said. Reports have suggested the company is close to a deal with the UK's Vodafone (NYSE: VOD) , but that talks have been snagged on some details, including whether there will be subsidies exchanged to underwrite the cost of the phone -- which retails for $500 and $600 in the U.S. -- or the monthly calling and data plans.

"European consumers are used to getting even high-end phones for free or close to free," Ovum analyst Jonathan Arber told MacNewsWorld. "There may be a standoff on the price tag."

Looking Ahead

There has also been speculation that Apple would tweak the iPhone to make it a better fit for the European market. The U.S. iPhone uses the EDGE (Enhanced Data rates for Global system for mobile communications Evolution) data network to download e-mail and Web pages. In Europe, however, 3G networks are far more prevalent, and Apple may be able to boost the performance of the device by switching to that standard.

"Consumers are going to look skeptically at a high-end phone with all these data capabilities that isn't a 3G device," Arber added. Apple may want to hold off on the launch of the iPhone on the continent until it can add the 3G capabilities, he noted.

Meanwhile, the U.S. launch of the iPhone almost certainly ratcheted up awareness of the coming release in Europe, said JupiterResearch European analyst Ian Fogg, with widespread media coverage of American buyers waiting in long lines to be among the first to own the device.

"Apple would like consumers to delay buying a new mobile phone from a competitor, to wait for the launch in Europe," Fogg told MacNewsWorld. While the unveiling of the iPhone in January provided some momentum for the product, the U.S. launch gave it a rocket boost of consumer awareness even as competitors tried to get their own converged devices to market first, he added. "It's a constant reminder that the iPhone is coming."