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Apple ends its arguments in the DRM trial, but it’s far from over

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Questions remain about who will represent 8 million iPod buyers

All the evidence for the $350 million court case against Apple is now in, but what we still don't have is someone to represent the some 8 million who purchased iPods during the class action period. That's an important detail that's still being hashed out ahead of next week, when the trial comes to a close and a jury of eight begins its deliberations. Despite the lack of a plaintiff, Apple presented evidence defending itself from the claims that it harmed consumers when creating the DRM system for iTunes and the iPod.

Today, Apple's lawyers said they still needed another day to file last-minute paperwork over "some last pieces of information" about a potential plaintiff who has spent the past few days being vetted in order to replace two other plaintiffs who were removed earlier in the trial. Last week, evidence emerged they either did not buy the correct devices or bought them outside the time period of the complaint, leaving the case's lawyers scrambling to find a replacement.

The jury gets to decide next week

The entire complaint hinges on exactly why Apple hardened its digital rights management software in iTunes and iPods nearly a decade ago. According to the suit, which was filed back in 2005, two updates Apple made to its iTunes and iPod software actively kept other companies from connecting their devices the jukebox software, as well as kept users from playing music from other stores on their iPods. It also claims Apple used that system to systematically raise the prices of iPods during that time, making more money in the process.

Taking a turn to defend itself this week, witnesses for Apple, which included two economists and its former VP of marketing and business management, made the case that the company not only improved its products from 2006 to 2009, but also managed to reduce prices of those devices in the process. In question are some models of the iPod nano, the iPod Classic, the iPod touch, and iPod Shuffle.

Mark Donnelly, who worked under Apple's marketing chief Phil Schiller and retired from the company last October, argued that Apple was always trying to fit more features into a new models, and consistently discounting older models. He recalled one such time that Jeff Williams, who is currently Apple's senior vice president of operations, ran into him in the middle of Apple's campus, and excitedly told him they could double the amount of storage they were planning to include in the upcoming iPod nano, but without spending more.

"Nobody really knew we'd done that."

"Jeff said ‘Mark, we're getting lots better prices on the flash. We could actually do better — we could double the memory of these [iPod] nanos,'" Donnelly recalled. The only problem is that the company had already finalized the product's launch, and was in the process of assembling millions of them overseas. The pair successfully pitched the idea to increase the memory up to Schiller, and Apple went about striking the deal on the larger memory, immediately building the higher configurations, then ultimately shipping the original ones to smaller markets at a lower cost, with nobody the wiser. "Nobody really knew we'd done that," Donnelly said. "We really enjoyed that we were able to pull it off."

iPod CD

Donnelly also recalled his time as part of an exclusive Apple committee that would come together to decide the prices for all the company's new products. Where late Apple CEO Steve Jobs once said the company had "zero" committees because Apple functioned like a startup, Donnelly painted an entirely different picture, explaining in detail how the company's senior executives and other "decision makers" would meet together in person, or on the phone to come up with the price for upcoming products, poring over gross margins, product specs, and head-to-head comparisons with devices made by other companies. Earlier in the case, the plaintiffs had brought out planning documents from these meetings to suggest that Apple was acutely aware of the competition and its market share, including that of iTunes. Donnelly said he'd looked at the iTunes market share "from time to time," but that did not elaborate on how it affected how Apple priced its products.

Prior to Donnelly, Apple called upon two professors from the University of Chicago, Robert Topel and Kevin Murphy, to poke holes in the damages calculations of the plaintiffs' economist Roger Noll. They said Noll hadn't factored in improvements to Apple's products in his analysis, and that changes like extra storage, longer battery life, larger screens, and new software features made iPods better over time. Murphy also compared Apple's integrated system of the iPod and iTunes to video game consoles from Microsoft, Sony, and Nintendo, as well as Amazon's Kindle, saying it was an identical idea.

"Integration is not an all or nothing thing. There are varying levels of integration."

"Some of the [game] titles will be the same," Donnelly said in his comparison to video game consoles. "But the actual thing you purchase will only work on that other system. They're malevolent. Integration is not an all or nothing thing. There are varying levels of integration."

The part of Apple's integration that under scrutiny are two security measures that were rolled out a year apart in iTunes and Apple's iPod software. One verifies the iTunes library, whereas the other verifies what's known as the keybag on iPod — basically a set of digital keys to unlock songs that have DRM. Once activated, these security measures did a number of things, from keeping iPods from playing songs that had DRM that had been tampered with, to keeping third-parties from changing the database of songs with jukebox software apps.

"I was told to authenticate the third-party player and keep them from syncing."

Rod Schultz, a former Apple engineer who had built a key aspect of the library checker, said today that he'd originally been tasked with the job because the company wanted to keep Linux-based music players from accessing the iTunes library after it had been reverse-engineered. "I was told that third-party players were corrupting [Apple's] database, so I was told to authenticate the third-party player and keep them from syncing," Schultz said. That became a feature in iTunes, and later right on the iPod, though Schultz — who left the company in 2008 to go build DRM technology for Adobe — said he hadn't worked on the version that went onto the iPod.

Earlier in the trial, Apple had argued that such third-party players, including one made by RealNetworks, attempted to hijack the iPod and created all sorts of issues for users that would damage a user's music library and the performance of their iPod. That's become a point of contention where Apple's said it was trying to protect users from buggy software, while the plaintiffs have accused it of shutting out competition.

The $350 million in damages Apple could be on the hook for is relatively small, but could triple if the jury says the company willfully violated antitrust laws, something that would push it beyond what Apple initially won in its patent trial against Samsung two years ago. Today was the last day of evidence from either side, with the jury set to begin deliberations after closing arguments next week.