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March 22, 2006

Why French ruling hurts Apple, iTunes and the iPod

posted by MR WAVETHEORY at 3/22/2006 02:07:00 AM
The French National Assembly passed a bill which according to CNN "would force Apple, Sony and Microsoft to share proprietary anti-copy technologies so that rivals can offer compatible services and players." Doing so would enable consumers to download iTunes songs onto devices other than iPods which consumers cannot do today. You can only download songs from iTunes onto iPods.

While the French rulling is bad news for Apple whose iTunes service operates in a closed ecosystems, it is great news for consumers. The philosophical question at hand is simple:

Does a Government Have the Right to Force Interoperability Upon Closed Proprietary Technologies?

The French government clearly thinks so. I believe it wants to break Apple's dominance in online music which frankly Apple has earned due to the superiority of its hardware design. Philosophical questions are impossible to answer, so enough said. The question investors need to ask is this:

How sustainable is Apple's leading marketshare in the online music space?

Simply looking at the competing products on the market, one can easily tell that 1) competitors are copying Apple's hardware design (Sandisk, Creative Labs, and let's not forget the almighty Dell perenially late, but always a force to be reckoned with) 2) competitors are copying iTunes (Sony Connect, Microsoft Music Store, Yahoo Music) and 3) prices are dropping ferociously.

It is often said that in order for a consumer product to be successful, it needs to break below the $100 barrier. Apple broke that barrier with the iPod Shuffle. While some would call it success, I would argue that breaking below the $100 barrier is the beginning of the end - and the beginning of rapidly diminishing margins.

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