In a trial questioning Apple’s use of software updates, iTunes chief Eddy Cue says they were necessary because hackers wanted to break apart the company’s digital-music ecosystem.
OAKLAND, Calif. — iTunes chief Eddy Cue rebutted claims that Apple tried to undermine iPod competitors nearly a decade ago, saying Apple was fighting a “never ending battle” against hackers to protect its digital media player and popularize its then nascent music business.
“Steve was mighty upset with me and the team whenever we got hacked,” Cue, testifying in a class-action lawsuit against Apple, said Thursday in reference to former CEO Steve Jobs, who died in 2011. “If a hack happened, we had to remedy that hack within a certain time period or they [the record labels] would remove all their music from the store.”
Apple was also trying to prevent others from breaking the ecosystem it had created between its iTunes software, iPod MP3 music player and iTunes online music store. “All these other guys that tried the approach of trying to be open failed because it broke,” he said. “There’s no way for us to have done that and have the success that we had.”
The class-action suit centers on an antitrust claim first made in 2005, but since amended over time, that alleges Apple kept iPod prices artificially high between 2006 and 2009 by using iTunes software updates to harm competitors, which Apple considered hackers. By continually changing its software to stop competing music stores like RealNetworks from allowing their music to run on consumers’ iPods, the plaintiffs argue, Apple broke the law and harmed consumers so it could maintain its dominance in the digital music market.
Cue is the first high-profile Apple executive to take the stand during the trial, which is in its third day and is expected to conclude next week before the jury weighs in. Apple marketing chief Phil Schiller and even Jobs, appearing via video deposition, are also expected to argue that companies like RealNetworks were reverse-engineering Apple products and exploiting flaws in its system. Apple says updates — numbered 7.0 and 7.4 — to the iTunes software that powered the iPod were in fact genuine product improvements to the technology.
So far, the court has heard from expert witnesses and Apple executives who have painted the company’s actions in contradicting lights. Ultimately, the jury will decide whether Apple’s intent in updating iTunes was to protect itself and its record label relationships, instead of trying to purposefully harm competitors. If the self-defense argument doesn’t hold up, Apple had a legal obligation to open its products up to competitors for the benefit of consumers, legal experts say.
“The plaintiffs in this case are making one of the most aggressive arguments that is available in antitrust law — that a company can actually have a duty to allow rivals to use that company’s property,” wrote David Olson, an assistant professor at Boston College Law School and an antitrust expert, in an email. “Obviously the court cannot change the past, but if it finds that Apple did have a duty to deal with rivals and violated it by locking them out, then plaintiffs can be awarded damages up to three times the amount of the injury.”
The plaintiffs are asking for about $350 million in damages, but that amount may jump to $1 billion if Apple loses the case.
Cue, who runs Internet software and services for Apple, joined the company in 1989 and eventually oversaw the launch of Apple’s online store in 1998. The iPod, a device that plays MP3 music files, was released in 2001. Cue helped launch Apple’s iTunes digital-music store in 2003, which later sold television shows and movies, and the App Store in 2008 for mobile applications. He led negotiations with the five largest record labels around 2002 to build out Apple’s initial 200,000-song library, which became available to consumers the next year.
He was also responsible for ensuring that Apple’s digital rights management (DRM) tool, called FairPlay, was in compliance with the record labels and that it was updated regularly to protect that relationship and secure Apple’s system. FairPlay acts as a kind of digital watermark that both marks where a purchase came from and prevents a digital media file from being played in unauthorized ways, such as on a competing MP3 player.
The plaintiffs claim that Apple unfairly used FairPlay to block out competitors, especially as record labels expressed interest in expanding beyond iTunes and the iPod to increase digital-music sales.
“The timing of when you made the decision to not become interoperable was only when you had a dominant position in the market,” Bonny Sweeney, the lead plaintiff’s lawyer, alleged in court Thursday. As early as 2004, one year after the iTunes Store launched, Apple controlled 70 percent of all online music sales.
“No, we thought about licensing the DRM from the beginning,” Cue said. “It was one of the things that we thought was the right move and we can expand the market and grow faster. We couldn’t find a way to do that and make it work reliably.”
Apple cites upholding security and user experience as reasons it did not license FairPlay. “Microsoft failed miserably when it tried to do this,” Cue added. “They tried to build a DRM they could license. It would sometimes work and sometimes it didn’t.”
Microsoft at the time had a music file format, WMA, that competed with the MP3 format Apple was using. Microsoft also developed a competing DRM technology that it openly licensed to third parties. Cue says that Microsoft and its exponentially larger market share in PCs meant that Apple did not have an insurmountable dominance in the market and that it succeeded only because of its strategy. “We stayed our course. We decided again that what we were doing was better,” he said.
Cue also says that record labels, when they first hammered out their contracts with Apple, requested DRM technology. Only when they discovered that iTunes was a success, Cue says, did they begin requesting the opposite. Yet even then, the record labels still wanted to restrict the ways customers could use digital music files in a way Apple says it combated.
“We believed in interoperability, which was DRM-free,” Cue said. “They [the record labels] wanted to have their cake and eat it too. They wanted to have all the interoperabilities with DRM-free with all the protections of a DRM.”
Only when Amazon, in 2007, began releasing digital music files DRM-free through its online store did record labels begin altering their strategy, Cue says, though even then only one of the four major labels, EMI, had shown interest in experimenting with DRM-free music at the time. In 2007, Apple hammered out a relationship with some of the labels to do just that, calling it iTunes Plus, and by 2009, DRM-free music had become standard across all major labels.