Why Apple changed its tune in Europe

The news this morning that the European Commission has dropped its unfair pricing case against Apple (AAPL) raises the question about how the company got into this mess in the first place.

The issue stems from a basic discrepancy: British customers have been paying 79 pence per song on iTunes (about $1.63 in today’s currency market) while the rest of Europe was paying .99 euros — roughly 20% less.

The British Office of Fair Trading filed a complaint with the European Commission, which in early April formally charged Apple and four music labels (EMI, Sony BMG, Universal and Warner Music Group) with anti-competitive pricing.

This was no laughing matter. According to Thompson Financial, the EC has the power to fine companies up to 10% of their annual worldwide turnover for breaching EU antitrust rules. (link)

An Apple spokesperson at the time made it clear that the company blamed its partners in the music industry:

“Apple has always wanted to operate a single, pan-European iTunes store, accessible by anyone from any member state. But we were advised by the music labels and publishers that there were certain legal limits to the rights they could grant us. We do not believe the company did anything to violate EU law, and we will continue to work with the EU to resolve this matter.”

It’s not quite that simple. Even when Apple cut that deal, back in May 2006, the company was under pressure from the music publishers to relax its one-price-fits-all policy and allow the labels to charge more for some content and less for other stuff — the very issue that has gummed up Apple’s negotiations with Hollywood and the TV networks.

What twisted logic led to the county-by-country pricing scheme is still not clear, but Apple obviously went along with it — and found itself in the EC’s crosshairs.

The problem went away today. The EC closed its case against Apple and the four music labels, and in return Apple agreed to equalize pricing across its European iTunes stores within six months.

Whether song prices in the U.K. will be going down or the rest of Europe’s going up is not yet known

It’s also too early to say whether the settlement is a sign new pricing flexibility in Cupertino. We should find out next week, when the terms of the rumored movie rental deals with Fox, Disney and possibly others are revealed.