iTunes: A Digital Music Monopoly?

Turn down your amp, Apple (Nasdaq: AAPL  ) . You're drowning out the rest of the band.

The Justice Department is apparently making preliminary inquiries into Apple's dominance in digital music. Several news agencies report that regulators are interviewing record labels and digital rivals to learn more about iTunes' pricing strategies and other business practices. This will naturally be a divisive issue, even if the market has spoken.

Apple commands 76% of the MP3 player market, according to research giant NPD Group. It's not Apple's fault that Microsoft's (Nasdaq: MSFT  ) Zune has been a perennial dud, or that SanDisk's (Nasdaq: SNDK  ) gadgets are mere fringe players. No one is forcing consumers to choose a device -- an iPod, iPhone, or now iPad -- that feeds into Apple's ecosystem.

Microsoft could have made its Zune more like a handheld Xbox gaming device. SanDisk's pricing advantages in flash memory should have given it the flexibility to be the price leader, while still raising the bar on what a player can do. It just feels wrong to rap Apple's knuckles with a ruler because its classmates aren't as bright.

Apple's dominance continues in the realm of digital downloads. Apple's slice of the market is now up to 70%, according to NPD. However, if we tack on CD sales to get a complete snapshot of Apple's role in music distribution -- knowing that Apple only does digital -- Apple's slice of the musical pie drops to 28%.

This may not seem like a troublesome chunk of the market, but it's a greater proportion than the share commanded by its two nearest competitors -- Amazon.com (Nasdaq: AMZN  ) and Wal-Mart (NYSE: WMT  ) -- combined.

Apple's foot is also a concrete brick on the accelerator pedal. Two years ago, Apple passed Wal-Mart in overall music sales. Now it's moving more than twice as many tunes as the country's leading retailer. 

Meanwhile, CD sales have been declining for years. In its latest quarter, Warner Music Group (NYSE: WMG  ) posted a 15% spike in digital music sales, while CD sales dropped. As the migration continues, Apple's share of the market will continue to climb.

Regulators apparently want to check Apple's growth before it's too late. The bigger it gets, the more easily Apple can dictate industry pricing and force labels to give it preferential treatment.

You're just too good, Apple. It's not your fault that you were stuck on stage with musicians who never learned how to play their instruments.

Should the Department of Justice crack down on Apple's business practices? Share your thoughts in the comments box below.

Microsoft and Wal-Mart Stores are Motley Fool Inside Value picks. Apple and Amazon.com are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz is so old-school that he still owns plenty of vinyl. He owns no shares in any of the companies mentioned here. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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