The war of words between Apple and RealNetworks has sparked debate of Apple's business model, copyright law and the impact of incompatible technologies on the music business.

RealNetworks last week announced its Harmony software, which will be incorporated into RealPlayer 10.5, now in beta. Harmony lets users download songs from the RealPlayer Music Store into more than 70 music player devices, including iPods.

This loosens Apple's proprietary grip on the iPod, which lets users play songs downloaded from the iTunes Music Store, MP3 files and music transferred from CDs -- but not songs in formats from vendors whose technology competes with Apple's FairPlay DRM (digital rights management) system. These include Microsoft's Windows Media Audio and RealNetworks' Helix.

Harmony allows users to play tunes originally formatted with Helix on devices designed to play only WMA or FairPlay songs.

After holding fire for a few days, Apple released a statement Thursday accusing RealNetworks of adopting "the tactics and ethics of a hacker to break into the iPod." The company also threatened action under the DMCA (Digital Millennium Copyright Act). Real countered that it broke no laws creating Harmony.

Format disharmony dampens sales

Though Microsoft represents a far bigger threat to Apple's digital media business than RealNetworks, the spat over Harmony touches a raw nerve in the industry. Incompatibilities among file formats and DRM systems is causing confusion among consumers and dampening online music sales, according to a variety of industry executives at the Jupiter Plug.IN conference in New York earlier this week.

Though sales of digitally distributed music will more than double compared to last year, reaching more than $270 million in 2004, online music sales as a percentage of overall music sales remain flat, at about 12 per cent, according to David Card, a Jupiter Research analyst. While digital music is helping the US music industry grow after four years of steeply declining sales, digital music still will not replace CDs or bring music sales back to their 1999 peak, according to a Jupiter forecast released at Plug.IN.

Several executives at the Jupiter event said that if consumers could buy songs from any site and play them on any player, it could spark more sales. "Harmony is a step in the right direction," said Jeff Bronikowski, vice president of business development at Universal Music Group, during a Plug.IN industry panel.

Apple's threats to RealNetworks illustrate the lengths to which companies will go to protect proprietary systems, however.

"In a way you can't blame Apple for trying to exert control and establish a standard, but the way they are taking the moral high ground and accusing RealNetworks of hacker tactics is a bit energetic," said Jonathan Zittrain, co-director of the Berkman Center for Internet & Society at Harvard Law School.

DMCA - untested ground

It is not clear, however, whether Apple would have a case: "The DMCA comes into play when actions are taken to circumvent a measure that prevents access to copyright material. The Lexmark cartridge case might be relevant here though, because in that case, reverse engineering for purposes of compatibility was found to be OK."

In a case involving printer maker Lexmark and Static Control Components, the US Copyright Office last year ruled that the DMCA does not prohibit reverse engineering if the intent is to make the duplicated product work with a separate computer program.

In addition, Real says that what it has done is not even reverse engineering: "What we did was not reverse engineering. We looked at publicly available data moving between the user and the iPod," Sean Ryan, RealNetworks' vice president of Music Services, said.

With its marketing clout and ubiquitous technology, Microsoft is a much bigger threat to Apple in the digital media business than RealNetworks, analysts point out. But Apple's rancour over Harmony is a sign that its business model is being threatened.

"Apple delivers content that drives sales of their hardware, and the hardware sales are tremendous, which is very important for Apple," said Tim Deal, a senior analyst with Technology Business Research.

Proprietary and open-source

Apple critics say that it is Apple's proprietary grip on its products that caused its share of the personal computer market to decline over the years. "We've seen where their technology strategy has led them in the past," RealNetworks' Ryan said.

Questions about how the proprietary nature of Apple technology affects its business have surrounded the company for years.

"In many ways, Apple has been proprietary from day one, and they've been given a pass on this (even from) open source people, either because they're the underdog, or because their products have been so damned elegant, as a result of having such tight-fisted control over them," Zittrain said.

The company may be forced to change direction over time, but right now, with iPods outselling other devices, it seems that Apple can afford to be exclusive.

"Apple may have to adapt over time as users needs and wants change, but right now consumers are eating up the iPod," Deal said