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Tuesday, March 21, 2006, 01:00 pm PT (04:00 pm ET)

PJ: Apple more likely to drop out of France than open iPod and iTunes

Reacting to the French National Assembly's vote today to force Apple to open its closed iPod and iTunes ecosystem, analysts for PiperJaffray said they believe Apple is more likely to drop out of the French market than open up its FairPlay DRM to competitors.

Earlier today, French lawmakers voted 296-to-193 to approve an online copyright bill that would require online music services and MP3 player makers to open DRM technology up to competitor's devices and services. The proposed bill now moves on to the French Senate for a final vote before becoming law.

"Given 61 percent of lawmakers in the French National Assembly voted in favor of the new online copyright bill, we believe the French Senate will vote for the bill and it will become law," analyst Gene Munster told clients in a research note Tuesday afternoon. "This will force Apple to open up iTunes (FairPlay DRM) to competing device manufacturers if the company continues to operate in France."

The analyst said that Apple is more likely to drop out of the French market than open FairPlay.

"While this sounds like a drastic move, we believe it would not materially impact business," Munster wrote. "We estimate that approximately 20 percent of iPod and iTunes sales occur outside of the U.S. The French market alone is likely less than 2 percent of iPod and iTunes business."

In the analyst's opinion, Apple would prefer to remove itself from the French market than "start what could be a slippery slope of other countries passing similar legislation."

"In the end, we believe that even if we are wrong and Apple does open up iTunes in France and other geographies, iPod sales will not be measureably impacted," Munster wrote. "Over the last several years, we have seen that, despite the presence of many highly functional online music services, sales of non-iPod devices have not taken off." He said the reason for this is that sales of iPods drive demand for online music sales on iTunes and not the other way around.

"Apple would be at risk to losing some iTunes business if similar laws to the proposed French online copyright bill were passed in other geographies, but it is important to keep in mind that the profitable component of the 'portable device + music service' equation is the portable device and a loss of some portion of music service would not have a dramatic impact on bottom line results," the analyst added.

PiperJaffray maintains its "Outperform" rating on Apple shares with a price target of $103.