When the iPhone hit the market, consumers were euphoric. But now, less than a year later, many of those same users claim that the business model Apple built around the iPhone violates anti-trust and unfair competition laws and have filed class action lawsuits, now consolidated as In re Apple & AT&TM Anti-trust Litigation, that have contributed to a significant decline in Apple's stock price.
How did the company that made its reputation as the anti-Microsoft end up the target of lawsuits alleging monopolistic behavior? The answer lies in Apple's use of a technological protection measure (TPM) designed to prevent U.S. consumers from using their iPhones with any wireless provider other than AT&T. Partnering exclusively with AT&T in the U.S. market reportedly brought Apple a significant percentage of the revenue generated by the influx of new iPhone subscribers.
However, it didn't take long for a New Jersey teenager, among others, to disable the TPM and enable consumers to use other service providers. Analysts have dissected Apple and AT&T sales figures to conclude that consumers have now hacked over one million iPhones. In response, Apple issued a software update that rendered some modified iPhones permanently inoperable.
This, of course, meant war.
Affected consumers allege, among other things, that hacking iPhones is legal under an exception to the Digital Millennium Copyright Act, which allows circumvention "for the sole purpose of lawfully connecting to a wireless telephone communication network." They say Apple is illegally punishing its customers for taking advantage of this exception. Problem is, though news reports often cite this exception, its narrow language may not offer protection, and courts have already concluded that the exception does not apply to selling modified phones. The court's interpretation of this exception and the parameters of the DMCA could prove central to the case against Apple and have a significant impact on all sorts of business models. Apple's lawyers will be tasked with parsing the exception and defending Apple's right to use TPMs to protect a business model.
This isn't the first time Apple has been in a fight over TPMs. Steve Jobs' February 2007 essay, Thoughts On Music, chastised record labels for requiring iTunes to use TPMs that prevent consumers from playing songs on portable devices other than the iPod. Jobs asked record labels to "imagine a world where every online store sells [TPM]-free music encoded in open licensable formats [such that] any player can play music purchased from any store, and any store can sell music which is playable on all players."
Recently, this imaginary world that Jobs labeled "clearly the best alternative for consumers" has nearly become a reality as the four major record labels have agreed to sell songs without TPMs, although not necessarily through iTunes. Ironically, Apple now finds itself similarly situated to the record labels with an innovative product that consumers love, but seeing many of those same consumers refusing to live within the business model that Apple has adopted to fund its creativity.
Both Apple and the record labels invest substantial resources developing groundbreaking products, and their ability to continue making such investments depends on recouping those costs, and yes, even occasionally turning a profit. Nevertheless, the moral to the story of the iPhone thus far is that, to succeed in this Burger King economy where consumers demand to "have it their way," businesses must be extremely careful to monetize creativity without alienating their customers, no matter how popular their products are.
Matt Williams is an attorney in Mitchell Silberberg & Knupp LLP's Washington, D.C. office. He counsels entertainment, publishing and technology companies regarding a variety of copyright and new media related issues.