INDUSTRY ANALYSIS
iTunes Invasion: Apple Takes Music War Overseas

Now that Apple (Nasdaq: AAPL) has set up iTunes Music Store beachheads in the UK, France and Germany, the question remains whether the Cupertino-based company can launch an offensive against competing vendors in its quest to capture the European digital-music market.

During his introduction of the new iTunes Music Stores, Apple CEO Steve Jobs declared that the company is working on what he called a "pan-European store" that it hopes to have running by October of this year.

Despite competition from other services, such as OD2 and Napster, Apple appears to have several things in its arsenal to lead its charge, including a growing iPod fan base, a partnership with AOL Europe and iTunes software, praised by many for its ease of use. At the same time, Apple must overcome breakdowns in talks with European independent labels and complex legal rules and regulations that crisscross the European Union (EU).

Apple's success on the European front is by no means certain. To gain a better sense of the situation, MacNewsWorld has examined some of the hurdles Apple faces in its invasion of the European online-music marketplace.

Apple's AOL Alliance

Apple's alliance with AOL Europe provides instant access to AOL Europe's 6 million users --- including over 1 million broadband users, according to an AOL fact sheet. AOL Europe's subscriber base includes 2.3 million in the UK, 1.2 million in France and 2.8 million in Germany.

AOL Europe users in these three nations can register for the iTunes Music Store with a single click. AOL spokesperson Ann Burkhart told MacNewsWorld that integration capabilities within AOL 9 allows AOL members to have their screen names and passwords passed directly to the iTunes Music Store for access.

In addition, Burkart explained that AOL employs promotions to deliver subscriber traffic to iTunes Music Store, with links spread across AOL music channels.

"When an AOL member clicks to buy a song on AOL, it can deliver them to the iTunes store to purchase," she said. However, AOL does not yet offer its European members payment-integration services, as it does with its U.S. customers. Burkhart acknowledged that she didn't know when such an option would become available.

Legal Hurdles

In an interview with MacNewsWorld, GartnerG2 senior analyst Mike McGuire pointed out several hurdles Apple faces in bagging European customers, most notably the need for Apple to reopen negotiations with independent European labels. According to him, Apple needs these labels to gain traction and market share in the EU.

Although he believes iTunes' easy-to-use interface is critical to its widespread adoption, McGuire said that Apple must get down to "brass tacks, contracts and lawyers" if it wishes to thrive on the continent.

"The European Union Copyright Directive [EUCD] pushes each member country to harmonize their individual copyright laws for consistency across the region," McGuire explained. "Apple has to work out online contract law issues, as the two go hand in hand."

For his part, Dr. Urs Gasser, a fellow at the Berkman Center for Internet and Society at Harvard University, told MacNewsWorld that Apple will still have a more difficult time in Europe than in the United States even if copyright and contract law is harmonized.

"It must be noted that any directive, and the EUCD in particular, is aimed at harmonization only and doesn't seek to make laws identical," Gasser said. "It is a characteristic of EU legislation as far as directives are concerned that differences in law continue to exist."

According to Gasser, these differences in laws are unlikely to prevent a successful pan-European iTunes Music Store because its business model is based on fundamental principles of copyright law that exist everywhere in the EU and are mandatory under the EUCD. However, they still could lead to higher transaction costs to Apple or consumers.

"Such differences may also reflect differences in long-standing consumer expectations and practices, and regional fair-use traditions," Gasser said. "The key question then is whether [the iTunes Music Store] will manage, across Europe, to level this variety of expectations and practices."