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Friday, July 28, 2006

Have Pirates Boarded Apple's iPod?

Stocks: (MSFT)(AAPL)

Rob Glaser, CEO of RealNetworks, is well-known for his colorful and often unintelligible comments on his competition. He hates the success of Apple's iPod because it has largely frozen Real out from any substantial success in the online music business.

During RealNetwork's earning announcment and call with investors, Glaser made two points about the iPod. One went over almost everyone's head. He called the iPod "the biggest Three Card Monty ever seen". It is fairly hard to imagine exactly how the music player is like a game of deception using playing cards, so it may have to be left at that.

Glaser's second comment was more troubling, at least for Apple investors. He commented that Apple was ignoring the iPod's use for "pirated" music.

There are a number of ways to alter the iPod's basic functions. It is possible to download music onto an iPod from other devices without buying the content from the iTunes story. This breaks the record industry rule that each download must be accompanied by a payment.

The legal issues around this kind of downloading are complicated. Typically, the consumer is at fault for "illegal" downloads. But, operations like Kazaa and BitTorrent have learned, the courts can go after them for setting up systems that "enable" downloads that violate copyright laws.

Apple finds itself in a sticky wicket. Another industry executive has accused it of aiding and abetting piracy of the intellectual property belonging to the record companies.

Apple's huge success with the iPod has not been without drawbacks. Among them is the accusation of Singapore based Creative Technology that the iPod violates its patents on portable multimedia players.

The iPod's issues as a device that can be used for playing "pirated" content is now front and center as something that Apple must face. Even President Bush has said that one of his staffers downloaded content from another player without going through a "store" and paying for the content.

The tremendous success of the iPod make it a target for a number of ground-breaking issues, and investors should not be surprised if, inside some courtroom, the debate over the iPod's status as a "pirate device" gets settled.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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