Like its counterpoint in Tokyo's Ginza district, the Apple Store in Corte Madera near San Francisco is the very essance of crisp, Bauhaus-like design. Clutter is banished and simplicity is prized, even to the point where the Apple logo, once drenched in rainbow colors, is now pure white-and like the Nike "swoosh," goes unaccomapnied by the company name. Inside the store, a new iMac G5. smootly demonstrated by a bearded twenty-something employee, has dispenced with the computer case--the CPU, bus and power supply are all built into the display. And near the store's center, a table full of iPods, from 4 to 20 GB, is so far uncluttered by that most annoying of adornments: signficant competition.

Unlike the Mac, which for all its clean lines and rainbow colors is but a niche market in the computer business, the iPod is actually the dominent product in its class, with some estimates putting the U.S. market share at 50 percent. In Japan, as here, the iPod has achieved high status, with some customers waiting weeks to take delivery.

The reason has much to do with the iPod's head-start and smart interface. At their core, iPods are simply miniature hard disk that can play back compressed music files-a design idea that has become the de facto standard for high-end players. And in what has become a post-Steve Jobs trademark, the devices an elegent look with easy operation. Most notable is the iPod's "Click Wheel," which lets you move and scroll through menus with a swirl of the finger-an interface so satisfying that you find yourself wishing the rest of the world operated as efficiently. The iPod is a rare instance of an American hardware company out-designing its Japanese competition-most notably, Sony. Akio Morita's company invented the portable music device, and Sony's embrace of the Minidisc gave it a small but loyal following among customers who liked the idea of a replaceable, rewritable media-smaller and more convenient than a CD. But the iPod's huge storage capacity gave music listeners something more: a way to carry and intuitively access their entire music collection-thousands of songs--in a device small enough to fit in a shirt pocket. By the time Sony countered with its own hard disk product, Apple had long become the device to beat.

And yet for all the iPod's success, you can't help wondering whether Apple is making the same kind of mistake it made with the Mac-keeping such tight control on the hardware and software that customers finally wander off in search of better deals as the rest of the industry catches up. This control is much apparent when it comes time to download music-that is, if you aren't dealing with MP3s. And you aren't dealing with MP3s any time you want to do the right thing and actually purchase music online, as opposed to pirate it.

Until last summer, the only place to purchase online music for the iPod was Apple's iTunes Music Store, a substantial resource with more than 700,000 tracks, with agreements from BMG, EMI, Sony Music Entertainment, Universal and Warner Bros, as well as independent labels. The per/song pricing of $.99 a song has become the industry benchmark. As with all for-pay music services, Apple permits some, but not unlimited, copying. Enforced by Apple's FairPlay digital rights managmement software, buyers can burn individual songs onto an unlimited number of CDs for personal use, listen to songs on an unlimited number of iPods, and play them on up to five Macs of PCs. They can also share music with any combination of Macs and PCs linked on an LAN and burn playlists up to seven times. What iPod customers have not been able to do is buy songs from any other source.

Then, last July, RealNetworks-maker of RealPlayer streaming media software and owner of the Rhapsody Internet jukebox service-announced that it had essentially cracked the code on FairPlay. Doing so allows iPod customers buy songs outside the Apple domain, most specifically on the RealPlayer Music Store. Harmony also supports the Microsoft Windows Media Audio DRM and RealNetworks's own Helix DRM. But FairPlay, and the galaxy of iPods behind it, are the real news. RealNetworks made that point by running advertisements showing an abstracted line drawing of an iPod with an open hasp at the top-making the device look, with its dial, like an unclasped combination lock.

"We are stunned"

The key to "unlocking" the iPod is what the RealNetworks calls Harmony Technology. The company claims that Harmony is the first "DRM translation system" that lets people transfer purchased music to every popular music device. "Compatibility is key to bringing digital music to the masses," said Rob Glaser, founder and CEO of RealNetworks, in a statement. "Before Harmony, consumers buying digital music got locked into a specific kind of portable player. Harmony changes all that. Thanks to Harmony, consumers don't have to worry about technology when buying music. Now anyone can buy music, move it to their favorite portable device, and it will just work, just like the way DVD and CDs work." Following Glaser statements were endorsements from BMG, EMI, Stone Gossard of Pearl Jam, Intel's Desktop Platforms Group, and Fred Davis, a recording artist agent.

Apple responded with a statement: "We are stunned that RealNetworks has adopted the tactics and ethics of a hacker to break into the iPod and we are investigating the implications of its actions under the [Digital Digital Millennium Copyright Act] and other law. We strongly caution Real and their customers that when we update our iPod software from time-to-time it is highly likely that Real's Harmony technology will cease to work with current and future iPods." At this writing, that is the extent of Apple's public comment-and even this terse paragraph could not be found on its website.

Meanwhile, RealNetworks had a public relations field day. It launched a pseudo-independent organization called "Freedom of Music Choice" (www.freedomofmusicchoice.org) complete with online petition and endorsements from Devo and the consummer advocasy group Public Knowledge. The Website included an interview with Glaser, in which he pointed out that the iPod is only device whose manufacturer "has a strategy of preventing access to any other music store." Given the iPod's popularity and high marketshare, said Glaser, that's a problem. "We don't think most iPod owners were aware of this when they bought their iPod. It doesn't have a warning on the box that says, 'This device will only play music from the Apple iTunes store.....' In fact, I bet most iPod users still don't realize that the digital music libraries they are beginning to invest in lock them in to only buying iPods in the future. Imagine how ticked off those consumers will be if the next great music device doesn't happen to come from Apple."

RealNetworks also defended itself against the Apple statement, denying it had violated any laws and claiming that "Harmony follows in a well-established tradition of fully legal, independently developed paths to achieve compatibility. There is ample and clear precedent for this activity, for instance the first IBM compatible PCs from Compaq. Harmony creates a way to lock content from Real's music store in a way that is compatible with the iPod, Windows Media DRM devices, and Helix DRM devices. Harmony technology does not remove or disable any digital rights management system. Apple has suggested that new laws such as the DMCA are relevant to this dispute. In fact, the DMCA is not designed to prevent the creation of new methods of locking content and explicitly allows the creation of interoperable software."

RealNetworks also sweetened the pot for consummers by offering, for a limited time, songs at just $.49 apiece, a half dollar off Apple's price. (The fee was clearly a loss-leader: while announcing the campaign, the company said that it could reduce its third quarter net earnings by up to $.01 a share.)

RealNetwork's aggressive publicity campaign, Apple's near silence and the American preference for choice struck a cord with many observers. In the weeks that followed, some thought Apple could make good on its threat to block Harmony from downloading files, at least temporarily. But many saw parallels between the iPod and an earlier Apple invention-the Macintosh-which lost market share because it was so much a closed system.

Writing on Forbes.com, Arik Hesseldahl wondered why Apple was so upset. Does the company fear that the potential for higher iPod sales could be offset by fewer iTunes downloads? If so, he argues, it's the concern is not work the effort. "Apple should beware looking like it's too jealously guarding the door to the iPod party, and should ready a contingency plan under which companies backing other formats, like Real, can join the party, but only under terms that Apple lays out. It won't hurt Apple one bit over the long term. The market demands openness and flexibility, and Apple, of all companies, should have learned this lesson by now. There was a time Apple owned the personal computer business. We all know how that turned out."

The Boston Globe's Hiawatha Bray noted that neither Microsoft or other manufacturers have complained about Harmony. "Apparently they understand that RealNetworks has done them a favor. RealAudio customers now have an incentive to purchase these newly compatible music players. You might expect Apple to take the same attitude. You'd be wrong." Bray said that this was Steve Jobs' first major mistake since he returned to Apple in 1997.

A Cnet review said that AAC format tracks downloaded from the RealPlayer Music Store actually sound better than those found on iTunes' offerings "thanks to a higher bit rate: 192Kbps vs. Apple's 128Kbps. If it's true that you can listen to purchased tracks that are higher than 128Kbps on the iPod, which would you choose?"

MP3 still king

But while critics are applauding RealNetworks, most actual iPod users are still doing what they always did-downloading MP3 files that aren't controlled by anyones's DRM architecture. The industry can say what they like about MP3 files-but they remain the most universally portable format of them all, supported by every media player worth owning, tradable, burnable, and shipable without restriction. MP3 files remain the medium of choice for iPods and its competitors-MP3s "ripped" from CDs owned by them or their friends, or obtained, legally or not, from peer-to-peer networks like Kazaa.

At the same time RealNetworks and Apple were squabbling about who gets to sell online music to iPod users, a U.S. court gave a big boost to peer-to-peer networks. In some ways, for better or worse, the ruling does more to keep the iPod truly "unlocked" to a bigger library of music than either company can provide.

The Ninth Circuit Court of Appeals, reperesenting the second to the highest tier in the U.S. court system, ruled that Grokster and Streamcast's Morpheus comply with American copyright law, even if users of the system don't always behave legally. The ruling could still be overruled by the U.S. Supreme Court, or the U.S. Congress could pass laws that change the picture. But meanwhile, the ruling stands. Ironically, the Ninth Circuit was the same court that shut down the original incarnation of Napster. The lawsuit was filed by a 28 entertainment companies, including MGM, Twentieth Century Fox, Universal City, New Line Cinema, and Warner Entertaiment Company-clearly demonstrating the increaded concern over motion picture pirating. Traditional recording companies incuded BMG, RCA, Motown, and Capital Records.

A close look at the court decision shows how tricky the piracy issue can be. The court drew parallels with the famous Sony Betamax case, in which use of that taping machine to copy copyright-protected material did not justify penalties against the company. Similarly, the court noted that peer-to-peer networks can be used legally, as well as illegally. For example, the popular band Wilco released one of its albums for free over its own website and via software networks after its own record label decided it couldn't make money by releasing it commercially. The ploy worked: as a result of the exposure, the band received another recording contract. The court also noted that recording artists have used peer-to-peer networks to publisize albums, that much public domain (non-copyrighted) music and other material is available this way. Because of this broad legal used, said the court, the defendents were not obligated to know whether their networks were also used for illegal purposes.

The design of peer-to-peer systems is also affected the ruling. Unlike Napster, which used central servers, "both StreamCast's decentralized, Gnutella-type network and Grokster's quasi-decentralized, supernode, Kazaa-type network" maintain no central index, or even corol over index files. Even if the defendents "closed their doors and deactivated all computers within their control, users of their products could continue sharing files with little or no interruption." Unlike Napster, Grokster and StreamCast do not operate and design an "integrated service" which they monitor and control." With Grokster and StreamCast, the users' computers themselves are the network. It exists nowhere else-certainly not at a Grokster or StreamCast site.

The court wasn't sold on other arguments, either. StreamCast maintains an XML file that can retrieve "addresses of websites where lists of active users are maintained." But the file is not required for the network to function. FastTrack software, which is owned by KaZaa/Sharmen) and used by Grokster, "maintains root nodes containing lists of currently active supernodes to which users can connect." But as a licensee, Grokster cannot demand that those root nodes be shut down. Both defendants also communicate with their users, but "not to facilitate infringement."

Ironically, StreamCast and Grokster were on safer legal ground because they did not and could not limit user access. While Napster reserved the right to toss copyright infringers off its network, neither StreamCast or Grokster even require registration, making it impossible for either to police the networks and terminate infringers. By taking a more hands-on approach, both companies protected themselves against charges they weren't being strict enough. "If the Software Distributors had a right and ability to control and supervise that they proactively refused to exercise, such refusal would not absolve them of liability," the court said. But such was not the case.

The court concluded by noting that we all now live in a world where technology changes faster than a court of law can keep up with. Often, the passage of time and the weight of the market do a better job of "balancing interests, whether the new technology be a player piano, a copier, a tape recorder, a video recorder, a personal computer, a karaoke machine, or an MP3 player."

The effect of the ruling appeared to attract more peer-to-peer users. IT Innovations and Concepts, which tracks digital piracy worldwide, said that the number people using the networks grew 15 percent in the month that followed, with Kazaa remaining the most popular and eDonkey becoing a "serioous competitor." The firm noted that smaller networks that rely on encryption to provide more anonymity are also gaining users. Another network, BitTorrent, was attracting more movie and software piracy.

As for the peer-to-peer industry itself, it was positively gloating. Adam Eisgrau, executive director of the Washington-based trade association P2Punited (which represents Grokster and Morpheus, together with the lesser known BearShare and Blubster) said in a statement that the "Ninth Circuit's complete and utter rejection today of the entertainment industries' attempts to warp long-standing, pro-innovation copyright law into a weapon against peer-to-peer technology and its developers is a profound and major victory for the American consumer and our economy."

StreamCast hailed it as a "landmark decision" that "deals a crushing blow to twenty-eight of the world's largest entertainment companies litigious attempt to curb the creation of new technologies for digital content delivery and distribution...." In a statement, CEO Michael Weiss said that "for over a century, the entertainment industry has fought new technologies, and they have been wrong every single time. We have always known that, like the VCR or the photocopier, there are a wide range of legitimate uses for our software, and the legal precedents, as well as history itself, have always been in our favor." He hoped the entertainment industry would "begin to view us as the primary channel for the distribution of digital media to reach the masses."

But that's not likely. While the Motion Picture Association of America made no public comment, Mitch Bainwol, chairman and CEO of the Recording Industry of America, said in a statement that the "decision does nothing to absolve these businesses from their responsibility as corporate citizens to address the rampant illegal use of their networks. We will continue to pursue legislative solutions and legal actions to address the ongoing illegal activity facilitated by Grokster and other P2P services.

"Furthermore, irrespective of what any court says, a debate has crystallized: it's legitimate versus illegitimate. It's iTunes, Rhapsody, the new Napster and Wal-Mart, Amazon, Musicnet, Dell, Sony Connect, Microsoft and others versus the likes of Kazaa, Morpheus and Grokster. It's whether or not digital music will be enjoyed in a fashion that supports the creative process or one that robs it of its future. That's the online future of music."

Six days later, the RIAA, having been turned back at the courthouse, went back to another tactic. The organization announced lawsuits against another 744 file sharers.