OAKLAND, Calif. — The Apple iTunes DRM trial underway in federal court here will come down to how jurors view certain code that Apple added to iTunes. The plaintiffs, representing a class of about 8 million consumers as well as large retailers, say it was anything but an "upgrade." They're seeking $351 million in damages.

Plaintiffs' lawyer Bonny Sweeney kicked off her opening statements describing Apple showing off its new Nano in 2006.

"It had twice the storage capacity and came in five different colors," she said. "But what Apple didn't tell its customers is that the code that came with the new Nano also contained the 'Keybag Verification Code.' That code did not make the Nano faster or improve its sound quality… it didn't make it sleeker or cooler. Instead, what that did is prevent customers who had legally purchased songs from a competitor from playing their songs on their iPod."

In this lawsuit, the plaintiffs are contending that specific changes Apple made to iTunes 7.0 and 7.4 were anticompetitive. Apple isn't being sued for having DRM, per se, but for making tweaks to its DRM that made some forms of inter-operability, like Real Networks' Harmony, stop working.

Both plaintiffs and defense lawyers presented brief histories of the rise of the iPod. Unsurprisingly, they saw a few things differently.

Before record labels would sign a deal with Apple to launch its iTunes store, they insisted that the songs sold there have some type of copy-protection, or DRM. Songs sold by Apple were coded to only work on iPods; if consumers wanted to move their music library over to a competing MP3 player, the only solution would be to burn the songs on to CDs, transfer them to a computer, and then move them to the non-Apple music player.

"That enhanced Apple's monopoly power," said Sweeney.

The plaintiffs' economics experts say the "lock-in" produced by Apple's DRM reprogramming resulted in a total of $351 million in damages. Sweeney laid out the details on some of that math. The plaintiffs say Apple re-sellers were hit with a 2.38 percent overcharge, while consumers experienced a 7.45 percent overcharge. The reseller-plaintiffs bought about 36 million iPods in the relevant time frame, spending an average of $173.95 per unit. Consumers bought 11.9 million units directly from Apple, spending an average of $219.15. There's also an additional category of around 485,000 sales which resulted from returns and upgrades.

The plaintiffs began showing some internal Apple e-mails, a theme they'll surely return to during the trial.

Once Real Networks launched Harmony in 2006, Steve Jobs, Phil Schiller, and other Apple execs immediately started discussing how to react to it. "Jeff, we may need to change things here," Jobs wrote to Jeff Robbins, suggesting Real's move required a change in the iPod.

"I think we need to talk... about doing a simple authentication in 6.0.2 for iPod," Robbins wrote in an instant message to a colleague a few days later. "Nothing with DB, but lock down the keybag."

Meanwhile, Jobs and Schiller workshopped a press release.

"We are stunned that Real is adopting the tactics and ethics of a hacker, and breaking into the iPod," wrote Jobs in an early e-mailed draft of their press release.

"I like likening them to hackers," responded Schiller. "Do we want to soften [the part about] how successful they have been?"

There wasn't much to soften. Even in August 2004, when Real had a sale selling MP3s for 49 cents each—a significant loss, since they were paying 70 cents for the tracks—Apple's market share only dropped a few percentage points.

Genuine improvements

In his opening, Apple attorney William Isaacson stressed that the iTunes 7.0 and 7.4 updates in question were real product improvements, not a strategic decision to keep out Harmony.

"If at the end of the trial, you find iTunes 7.0 and 7.4 were genuine product improvements, you must find Apple did not engage in anticompetitive conduct," said Isaacson.

The 7.0 update, pushed to consumers in 2006, was "the most significant update since the initial launch of iTunes," said Isaacson. "It took the music revolution into movies—movies, for the first time, were available on iTunes. Album art was available for the first time."

Even as he described how the 7.0 update wasn't all about DRM, Isaacson did acknowledge Apple viewed the Real Networks system as an intruder in their world—a hacker. The company didn't see what Real Networks was doing as very different from other famous hackers trying to break into iTunes, like DVD Jon.

"Harmony was software that ran without permission," said Isaacson. "It wanted to insert itself between the iPod and iTunes. It had to build a keybag, music database, and mimic what FairPlay was doing, and trick FairPlay... It posed a danger to the consumer experience and the quality of the product."

When iTunes 7.0 and 7.4 were launched, among other changes, the company updated its encryption, he said.

Real Networks' reverse-engineering became "outdated" because of those updates. "We changed the encryption because that's what you do with encryption."

The opening statements finished up about 11:00am Pacific time. The trial is expected to continue for a few weeks. US District Judge Yvonne Gonzalez Rogers is holding this jury trial in the mornings, handling other criminal and civil cases during afternoons.

Testimony got underway this morning, beginning with a former Apple reseller named Kenneth Reigel, who testified for the plaintiffs.

During his opening, Isaacson also pointed out that Real Networks wouldn't be testifying at trial. Gonzalez Rogers told the jurors that Real wasn't a party to the case and ordered jurors not to consider why no company representative was testifying.