Apple Faces Another Federal Investigation

By Mike Schuster May 26, 2010 2:00 pm

The company may have illegally wielded iTunes' massive clout against Amazon and record labels.

"What can you expect when you're on top? You know? It's like Napoleon. When he was the king, you know, people were just constantly trying to conquer him, you know, in the Roman Empire. So, it's history repeating itself all over again."
-- Dirk Diggler, Boogie Nights

It's certainly familiar to Apple (AAPL). Having reportedly bore the brunt of one federal antitrust investigation earlier this month, Apple faces another probe into how it handles its digital music business. According to the New York Times, the Justice Department is conducting the inquiry after allegations suggested Apple forced record companies to pull their support of Amazon's (AMZN) "MP3 Daily Deal," which provided consumers exclusive access to new music.

Back in March, Ed Christian at Billboard Magazine mentioned Apple's frustration with that promotion and spoke with the head of sales at a major record label to learn how to combat its success. Christian claimed that Apple withdrew support of certain releases that were featured as a Daily Deal. "In response," Christian wrote, "label executives at Capitol, Capitol Nashville, and Jive recently opted against participating in Daily Deal promotions."

An industry source confirmed the claim to Greg Sandoval at CNet, referencing an instance where iTunes representatives contacted Sony Music Entertainment (SNE) after J-Records artist Alicia Keys popped up within the promotion.

Citing other unnamed sources, the New York Times reported that although investigations are in their early stages, employees at Apple, top record labels, and other digital music retailers have already been interviewed by the Justice Department. Given iTunes' overwhelming market share -- roughly 70% to Amazon's 8%, according to market researchers NPD Group -- federal regulators see the retailer as a dominant figure in the industry. And with its clout in the music business, Apple must prove it hasn't abused its power against other smaller online marketplaces like Amazon, Microsoft's (MSFT) Zune market, and Rhapsody.

Apple has been racking up the investigations as of late. Already it has garnered inquiries over its and AT&T's (T) rejection of the Google (GOOG) Voice iPhone app, its well-publicized ban of Adobe (ADBE) Flash, a possible antitrust violation with members serving on both its and Google's boards, and an illegal truce between Apple, Google, Intel (INTC), IBM (IBM), and Palm (PALM) that no employee would be "poached" from another's company.

iTunes also earned scrutiny from the European Union three years ago over allegations that it restricted competition.

In light of its increasingly aggressive business tactics and frequent run-ins with federal inquiries, Apple needs to take special care to stay within the law. As Daniel L. Brown, an antitrust lawyer at Sheppard Mullin Richter & Hampton, told the New York Times, "Certainly if the Justice Department is getting involved, it raises the possibility of potential serious problems down the road for Apple."

On the other hand, it's unlikely any amount of fines will put Flash on the iPhone.

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