The European Commission today confirmed its investigation into alleged market divisions in the on-line music industry. The Statement of Objections—a formal document comparable to a complaint in the Commission’s proceedings—was sent to major record companies and Apple. Here is the press release:

The European Commission can confirm that it has sent a Statement of Objections to major record companies and Apple in relation to agreements between each record company and Apple that restrict music sales: consumers can only buy music from the iTunes’ on-line store in their country of residence. Consumers are thus restricted in their choice of where to buy music, and consequently what music is available, and at what price. The Commission alleges in the Statement of Objections that these agreements violate the EC Treaty’s rules prohibiting restrictive business practices (Article 81). Apple operates a series of iTunes on-line stores in the European Economic Area (EEA) which sell music downloads. The Statement of Objections alleges that distribution agreements between Apple and major record companies contain territorial sales restrictions which violate Article 81 of the EC Treaty. iTunes verifies consumers’ country of residence through their credit card details. For example, in order to buy a music download from the iTunes’ Belgian on-line store a consumer must use a credit card issued by a bank with an address in Belgium.

Apple acts as the distributor for the record companies; it would seem to me therefore that agreements between the record companies and Apple, under which Apple may only sell songs within territorial restrictions, is a vertical restraint, limiting interbrand competition. Vertical restraints, which are almost always permissible under the rule of reason in the U.S. (unless, for the moment at least, they concern minimum resale-price maintenance), tend to be viewed more restrictively under EU law. Such restraints would come under Regulation 1983/83 (and specifically Art. 3(c)?) Regulation 2790/1999 with regard to the agreements posterior to 1st January 2000 (and specifically Art. 4(b) and 4(c)), but (as commentator Pascal notes) would come under Art. 81. Still, the result is odd that the same distributor, Apple, covers the territories of several member states and the restrictions of the iTunes stores are entirely internal to the distribution by Apple. That is, Apple is not restricted from selling to from someone in France, it just can’t do so through the Belgian iTunes music store. I am curious to what extent the offerings and pricing between the Belgian and French iTunes music stores actually differ. (Do you know? Tell us.)

The Wall Street Journal ($) reported this morning. ABC also had the story, including Apple’s reaction:

Apple spokesman Steve Dowling said Monday the company wanted to operate a single store for all of Europe, but music labels and publishers said there were limits to the rights that could they could grant to Apple. “We don’t believe Apple did anything to violate EU law,” he said. “We will continue to work with the EU to resolve this matter.” The cost of buying a single song across the 27-nation bloc varies among the available iTunes stores in EU nations. For example, downloading a single in Britain costs $1.56, in Denmark $1.44, while in countries using the euro such as Germany and Belgium, a single costs $1.32.

Oh, and in case you were wondering. The EU also said:

The Statement of Objections does not allege that Apple is in a dominant market position and is not about Apple’s use of its proprietary Digital Rights Management (DRM) to control usage rights for downloads from the iTunes on-line store.

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