By Prince McLean

Published: 11:00 AM EST (08:00 AM PST)

Analysts for JP Morgan, who offered its clients a 51-page report on the role of DRM in the portable
music player market last Spring, issued a followup report this week detailing the impending legal situation in France as it applies to Apple Computer, saying it does not believe other countries will follow suit.

Apple has publicly stated it is firmly against the recently proposed French law, which threatens to force Apple to open its iPod + iTunes ecosystem in the country, arguing that it would make France a haven for digital music and movie piracy.

"The U.S. Commerce Secretary Carlos Guiterrez recently stated his agreement with Apple’s stance, suggesting France’s sentiment is not shared by U.S. lawmakers," analyst Bill Shope said to clients in a research note release on Tuesday and obtained by AppleInsider "At this point, Denmark is the only other country that has exhibited support for the French law, and it appears the E.U. does not yet share this opinion."

Shope said it is not his believe that Apple is on the verge of making the same mistake it made with the PC industry by keeping consumers locked-in to its proprietary iPod and iTunes technologies, citing support for MP3 as one of the major reasons.

"In the past four years, discussions of customer lock-in have become taboo, as post- bubble IT consumers seem to avoid lock-in like the plague. As a result, the lock-in provided by DRM can actually be seen as a source of weakness for Apple’s digital music business, and a classic sign that Apple is once again foregoing long-term
market dominance in favor of short-term barriers to entry," the analyst wrote. "But we believe this is a popular misconception driven by faulty analogies with the history of the PC industry. Apple’s iPod is actually quite 'open,' and it supports MP3, AAC, and WAV music compression formats."

Shope noted that the company's support of MP3 files allows customers to burn their CDs and even illegally download music into their iTunes music library. "None of this content is protected by FairPlay, and as a result, the lock-in we have discussed does not apply," he wrote. "Any iPod customer that feels uncomfortable with DRM lock-in or purchasing music online can simply buy their music in CD form or download music from P2P sites."

While this "perceived" openness has been largely missed by the mainstream media and industry experts, it is certainly not missed by Apple’s customers, the analyst said. "Though the company's proprietary music store greatly increased demand for iPods, we believe the openness afforded by support for MP3 files has also been an important driver of the iPod’s success," Shope wrote. "The apparent failure of Sony's Network Walkman NW-HD1 and VAIO Pocket VGF-AP1L devices, both purported iPod killers, provides important support for this argument."

Sony's devices initially only supported its proprietary ATRAC format, not MP3, and consumers largely stayed away. While the consumer electronics company in September of 2004 eventually announced a major strategy reversal in providing support for MP3 files in future products, the shift was too late, the analyst said.

In the United States, the legal protections behind DRM systems are largely derived from the Digital Millennium Copyright Act (DMCA), with laws in Western Europe being quite similar, Shope noted. However, some areas of Asia and Latin America have less stringent legal frameworks that may partly constrain the global expansion of Apple’s digital music model over the near-term, he said. "But we believe these constraints are unlikely to persist."

The analyst further believes that France’s moves to legalize DRM circumvention will be an isolated event, and offered several supporting arguments. He noted that while DRM provides a strong source of "locking in customers," music labels are unlikely to support markets without DRM protection. "If the French law passes, we believe the online music providers will either choose to exit France, or they will end up with very limited content offerings in the region," he wrote.

Shope also believes the law could end up harming the consumers and content owners by limiting their legal purchase options, and hence fueling a rise in piracy.

The analyst also offered his opinion on how important the French market is to Apple. "We would prefer that Apple sell the iPod and iTunes content into as many markets as possible, but as we mentioned above, the legal environment in France may force Apple to reduce its iTunes presence in France," Shope told clients. "Apple does not disclose its exposure to individual countries in Europe, but we suspect France accounts for less than 1-2 percent of Apple’s total music revenues. Even if Apple discontinued its online music store in France, the company would still continue to sell iPods, Macs and other products." As a result, he said, an exit from the French market is likely to be immaterial to the company’s financials.

Overall, JP Morgan believes the recent actions by the French government will have limited impact on Apple, and suspects the adverse reactions from companies and consumers will make other countries wary of taking similar steps.

"At 24x our calendar 2006 earnings-pershare (EPS) ex-options estimate, we continue to believe Apple’s stock has significant upside potential, despite the likelihood for continued volatility over the near-term," the firm said. "We continue to believe the company’s current revenue and profit momentum, expanding product set, and potential for significant long-term PC share gains suggest this valuation will continue to expand."

JP Morgan reiterated its Overweight rating Apple shares.