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The deals Apple Inc. struck with record labels to stock its European iTunes stores may violate EU competition rules, regulators said Tuesday.
Apple and the record companies were notified of an investigation into their agreements after regulators built up a "very strong case," said European Union spokesman Jonathan Todd.
People can only download singles or albums from the iTunes store in their country of residence - a policy that amounts to unlawful "territorial sales restrictions," the Commission said.
"Consumers are thus restricted in their choice of where to buy music and consequently what music is available, and at what price," the Commission said in a statement.
But Apple spokesman Steve Dowling said the company wanted to operate a single store for all of Europe, but music labels and publishers said there were limits to the rights they could grant to Apple.
"We don't believe Apple did anything to violate EU law," he said. "We will continue to work with the EU to resolve this matter."
Investigators have been gathering evidence on Apple's deals with Sony BMG Music Entertainment, Universal Music Group and EMI Group PLC for the past two years, after Britain's Consumers' Association filed a complaint with the Commission in 2004.
"We do not believe we have breached European competition law and we will be making that case strongly," said Amanda Conroy, a spokeswoman for EMI in London.
Sony spokeswoman Sylvia Shin offered no immediate reaction to the investigation and a call made to Universal Music was not immediately returned.
Apple and the record companies have two months to answer questions in the "statement of objections" from regulators. If found guilty, a company could face hefty fines, which in theory could total up to 10 percent of the company's worldwide annual revenue.
The cost of buying a single song across the 27-nation bloc varies among the available iTunes stores in EU nations. For example, downloading a track in Britain costs $1.56, in Denmark $1.44, while in countries using the euro such as Germany and Belgium, a single costs $1.32.
Consumer groups welcomed the EU's move.
"As I can go from the U.K. to Germany to go into the shop to buy a CD there, which is cheaper or more expensive than in the U.K., I should have the same opportunity online; that is what we are asking for," said Cornelia Kutterer, senior legal adviser at the European consumer group BEUC.
The EU investigation comes amid moves by consumer rights groups in Germany, France, the Netherlands and Nordic countries to force Apple to change the rules it imposes on its online music store customers.
The groups are demanding Apple lift limits preventing consumers from playing their downloads on digital players other than Apple's iPod. In February, Norway, which is not a member of the EU, declared those limits illegal and gave Apple until Oct. 1 to change its compatibility rules or face legal action and possible fines.
The EU investigation does not deal with these concerns, however.
Apple has said it is willing to open iTunes to players other than iPods if the world's major record labels moved to change their anti-piracy technology.
Apple and EMI announced a deal on Monday that would allow EMI's music to be sold on iTunes minus anti-piracy software that limits its use on some players. The move is expected to be watched - and likely followed - by other record labels.