Recently, RealNetworks developed a snazzy workaround that allows its proprietary music files to be played in an iPod, calling the new system Harmony. Why such a move? iPod currently dominates the portable player market, and that is driving consumer adoption of the companion iTunes Music Store, strengthening the Apple brand. Downloads from iTunes are encoded in the Apple AAC codec, which easily port into the iPod. But the iPod remains closed to Real files, a source of growing frustration to Real CEO Rob Glaser. The larger the iPod grows, the less attractive offerings from RealNetworks become. And so, Harmony was born.

The Real “sneak attack” was quite the newsflash (just search “real harmony” on Google News to get a taste). But all the while, iPod users kept buzzing about their digital business. Demand remained strong: Apple recently came out with its fourth-generation iPod, and mini sales continued to surge overseas. For most iPod users, the whole thing was essentially a non-event. The ripping, transferring, listening, and playlist-organizing continued unabated in Apple country.

And as long as Apple dominates the market, its users will continue their blissful routines. The iTunes Music Store now has over one million tracks available, far more than Real’s catalogue, and its software is considered to be much more user-friendly. Total iTunes downloads hit 100 million in July – another first. It’s a system that works for its users, and Apple has never been good about making compromises with outsiders.

But for the industry overall, the issue is a sore one, with the now-tired phrase “format incompatibility” becoming a dangerous reality. Every digital-music store wants to control the format that music fans use, including Real, Apple, Sony, and Microsoft. The runaway success of iTunes and the iPod simply means that Apple is winning this race by a long way, and ultimately has the greatest chance of becoming the de facto standard for digital music listeners.

But players like Real and Microsoft are not so quick to accept that fate. There are plenty of music fans that are yet to try a music file that is not in the open MP3 format, and that spells opportunity for Apple competitors. If and when these users enter the paid world, Apple’s competitors are waiting. Yesterday’s iTunes user could become tomorrow’s MSN loyalist. And once someone is locked into a system, they can’t easily make a switch to a competitor. It is the Balkanized world of digital music today, and that could get really annoying for music consumers down the road.

But with Harmony, that divide may have been bridged a bit. Rob Glaser has always referenced higher notions of format compatibility and ease-of-use. It makes sense: consumers should be able to buy a music file anywhere and feel confident that it is compatible with any device. That will increase buyer confidence and help propel the digital music industry as a whole. But cynics point to desperate attempts by the digital magnate to ride the huge success of the iPod. In essence, Real wants a piece of the pie, and Apple currently owns the bakery.

So now it’s Apple’s move. In a tersely worded statement, Apple professed to being “stunned” by the development, and threatened legal action. Most importantly, Apple pointed to future iPod firmware upgrades that would make Harmony useless.

The legal path could be dicey. Already, Apple has hinted at using statutes of the Digital Millennium Copyright Act (DMCA) to combat Harmony. That law, enacted into US law in 1998, prevents the “circumvention” of DRM systems. But according to some legal experts, that may not hold water in court. Real itself scoffed at the idea, stating that "the DMCA is not designed to prevent the creation of new methods of locking content, and explicitly allows the creation of interoperable software".

The DMCA is open to a great deal of interpretation, and there may be a distinction drawn between outright hacking ("circumvention") and reverse engineering for compatibility purposes. Real could fall in the latter camp and avoid penalties. Intellectual property attorney Ken Dort recently had this to say to C|Net: "What the DMCA was meant to protect wasn’t this. [RealNetworks] has done what people do all the time. They buy the latest, greatest widget of a competitor and take it apart." Real agrees: "Harmony follows in a well-established tradition of fully legal, independently developed paths to achieve compatibility."

In fact, there does appear to be precedent that would favour RealNetworks. A recent case involving printer cartridges found that creating product modifications for compatibility is permissible. The case, which involved Lexmark International and Static Control Components, was ruled on by the US Copyright Office.

Perhaps the easiest defense for Apple lies in the iPod itself. Apple could render Harmony useless with certain firmware upgrades, enticing users to upgrade their players with various extra features. With newer iPod models, Harmony can be blocked without the consumer even noticing.

But could incompatibility kill Apple once again? The age-old Mac-versus-PC battle reads like a tired novel, but the result is that Mac users are now less than 5 per cent of the total computer market. Could Jobs and Apple be marching down the same patch again, this time in the music realm? Not according to some: “It's kind of silly to assume that the company is going to follow the same path and make the same strategic decisions they made ten or 15 years ago,” according to Michael McGuire, analyst at Gartner Research. “Is it possible the company will do exactly the same thing? I suppose. I think it's unlikely, however. For right now, there is no compelling business proposition for them to do anything other than what they're doing.”

Perhaps the most basic question is whether the Harmony system actually works. Although there have been some snafus and bugs in the beta version, so far the system looks like a solid reverse-engineering job. A raft of testers has been able to take Real-encoded files and convert them successfully into Apple AAC tracks. The impenetrable iPod has been conquered, at least for now.

So what’s next? A lot depends on the success of Apple’s legal defence. If Apple successfully shuts Harmony down, then everyone goes back to square one. But if Real triumphs, then a Pandora’s box could take hold. Already, Glaser has indicated that he is willing to share the Harmony system with other digital music stores. And companies like Napster have already expressed interest, but are waiting for the legal storm to pass.

For Apple, a case against Real puts a lot more than just Harmony at stake. A loss could open the family jewels, granting iPod access to every interested competitor. That would be a mixed result: Apple would lose some control over its closed system, but consumers would ultimately gain with increased interoperability. For now, though, most iPod users aren’t really tuning in – unless it’s to their own playlist.