Apple Seen Putting Early IPod Users in Costly Bind

Once upon a time, Apple Inc. (AAPL) forced customers to give up their iTunes downloads if they switched from the iPod to another digital music player or burn all their songs onto CDs and then re-load them.
Today, a Stanford University economist put a price on those transactions to justify the demand for more than $1 billion in damages sought by consumers at a jury trial over claims that Apple tried to maintain an illegal monopoly on digital music from about 2006 to 2009. The consumers allege that Apple, facing competition from companies that sold music which could be played on the iPod, changed its technology so that songs it sold worked only on an iPod.
Consumers who bought rival music players, like Microsoft Inc.’s s Zune, would incur “costs” if they wanted to keep their music, Roger Noll, the Stanford professor, testified in federal court in Oakland, California. They would have to burn it onto a compact disc in an unencrypted format and then load the music back onto their music players -- or buy the music all over again, he said.
“The key point to this is that all the alternatives had costs,” Noll said. This cost would tend to “lock in” consumers to iPods, discouraging them from switching to rival players, Noll said. As a result, consumers would be less “price sensitive” to iPods and therefore Apple could charge more for them, he said.
The consumers’ lawsuit, initially filed in 2005, took almost a decade to get to trial. Jurors began hearing testimony last week and the trial is expected to wrap up this week.

Retailers, Resellers

Attorneys representing as many as 8 million consumers and 500 retailers and resellers who bought iPods from 2006 to 2009 claim Apple modified iTunes software so music downloaded with software made by competitor RealNetworks Inc. (RNWK) couldn’t be played.
Noll said Apple’s introduction of iTunes 7.0, which blocked downloads by RealNetworks, raised the prices of consumer iPods by 7.45 percent, or $16.32. This cost consumers $195 million, he said. Noll based these figures on an elaborate statistical analysis of iPod prices and market factors.
The economist said Apple overcharged resellers for iPods by 2.38 percent for a total of $149 million. Under federal antitrust law, a jury’s award of damages could be tripled.
Apple has argued that Noll’s theory is “implausible,” saying in a court filing that RealNetworks, which isn’t a party in the case, was a minor player and there’s no evidence consumers were locked into buying an iPod.

Technological Changes

Apple’s technological changes to iTunes were genuine product improvements that enhanced the iPod, Apple senior executives testified last week.
As Noll testified about the alleged costs of Apple’s dominance over digital music, a dispute between lawyers for both sides about whether the case should be allowed to continue at all continued to hang over the trial.
Apple said dismissal of the case is warranted because the single named plaintiff in the class-action lawsuit -- whose claims are meant to represent what happened to other iPod customers -- never directly purchased any of the devices covered by the complaint.
Marianna Rosen, a South Orange, New Jersey, resident and lead plaintiff, bought iPods for herself and her son in 2008 using a credit card issued by the law firm of her then-husband, according to court filings. Rosen said she used the law firm’s credit card for a personal purchase because the firm was marital property, and that using that card doesn’t disqualify her because the iPods were for her and her son, not the law firm.
Apple, based in Cupertino, California, said that by law the purchases made with a corporate credit card are for the corporation, so Rosen has no right to be in the case. The other iPods she bought aren’t covered by the lawsuit, the company said.

Two Ipods

“This $1 billion case is now about one half of two iPods,” Bill Isaacson, Apple’s attorney, said today in a court filing.
U.S. District Judge Yvonne Gonzalez Rogers said today that Apple’s own records show there are at least 8 million consumers who purchased iPods whose interests are at stake in the trial. She questioned whether she can accept a jury verdict if Apple is right that without a named plaintiff the case can’t go on.
If Rogers decides there’s no case after the jury decides the case, “the verdict is null and void no matter who wins,” Isaacson said.
Bonny Sweeney, a lawyer for consumers, said the matter should be decided before a verdict is reached. Consumer lawyers have been contacted by people who bought iPods covered in the case, according to Sweeney, who has urged Rogers to allow her to substitute another iPod customer for Rosen.
Rogers questioned how a non-lawyer can have ownership or stock in a law firm. Consumer lawyers said the husband’s stock in the firm is considered marital property.
“Well you have certainly created a problem on the plaintiff’s side,” Rogers said to the consumer lawyers.
The case is the Apple iPod iTunes Antitrust Litigation, 05-00037, U.S. District Court, Northern District of California (Oakland).