The noises coming from the music industry and the US software and entertainment groups are distinctly out of tune with each other, after the European Commission launched its formal investigation into the Apple iTunes antitrust case this week.

EMI, Warner, Universal and Sony BMG were formally charged alongside Apple for breaking European competition rules. The European Union's top antitrust regulator alleges the agreements between the companies that form the basis for the sale of songs through iTunes restrict competition and are illegal.

"Consumers can only buy music from the iTunes online store in their country of residence. 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.

The problem, according to the regulator, is not the price differential itself, but the arrangement between Apple and the record companies that bar European consumers from shopping round for the best prices.

Downloading a song from an iTunes website in a Eurozone country costs 99 cents, while in the UK it costs 79p or €1.17. Danish iTunes users fork out 8 per cent more than in the Eurozone.

Apple yesterday pointed a fat finger at the record companies. It says it always wanted to operate a single, pan-European iTunes store accessible by anyone from any member state.

But it says: "We were advised by the music labels and publishers that there were certain legal limits to the rights they could grant us," adding that it did not believe it violated EU law.

Record companies, meanwhile, argue that Apple ultimately decides the retail prices for downloads and that the restrictions that bar iTunes users from accessing a website outside the country of residence is due to the copyright arrangements.

Copyright is currently awarded on a country-by-country basis and the collection societies - which collect royalties on behalf of song writers - are paid on acountry-by-country basis.

Apple needs to account for the royalties on a country-by-country basis. This would become almost impossible if - for example - a UK resident bought a track off iTunes in Germany, said Alice Enders at Enders Analysis, a media research firm. The difference in VAT also complicates matters for consumers wanting to cross borders to buy goods, she adds.

But a spokesman for Neelie Kroes, the EU competition commissioner, says: "We don't think that is relevant since in the vast majority of cases the majors hold the rights to their repertoire for the whole of the European economic area."

He made clear that the antitrust case was directed primarily against the big music groups, and not against Apple. Apple, though a recipient of the charges, was not the most significant target. "The main focus of our attention is the record companies," he says. "Our current view is that this is an arrangement that is imposed on Apple by the major record companies."

Alena Kozakova, principle economist at Which?, the UK consumer group that lodged the complaint about the price differentials on iTunes says the issue falls at the boundary between competition law and intellectual property law. "It's a very complicated case. But Brussels is saying 'you can't hide behind the intellectualproperty law'," she says.

Apple and the record companies have two months to defend themselves. But they will need strong arguments to change the Commission's view, says Ms Kozakova, who used to work at the EU.

Which? lodged its complaint to the EU in February 2005 and it has taken more than two years for Brussels to build up a case.

The expected remedies may lead to Apple opening a pan-European iTunes store. But even if Brussels can force the companies into remedial action, this could take more than a year, says Ms Kozakova.

Baffled industry executives trying hard to read between the lines

When Eric Nicoli stood alongside Steve Jobs from Apple on a stage at EMI's London offices this week - after a performance from Damon Albarn's new band, the Good, the Bad and the Queen - some analysts and music executives were left wondering whether the new alliance was part of the EMI chief executive's poison pill strategy, writes Emiko Terazono.

EMI's agreement to sell its catalogue free of copyright protection on Apple's iTunes makes it the first large music company to drop digital rights management (DRM).

DRM prevents piracy, however some consumers blame it for restricting the use of downloaded music on various devices.

EMI's arch-rival Warner has been strongly against dropping DRM.

Mr Jobs, chief executive of Apple, in an open letter earlier this year, called for record companies to offer DRM-free tracks.

In response, Edgar Bronfman Jr, the head of Warner, called the idea "completely without logic or merit".

The merger of EMI and Warner Music has been mooted for years, although the most recent takeover talks were called off last year after the European Commission announced it was reviewing the music joint venture between Sony and Bertelsmann.

EMI has tried to be the aggressor by making a move on Warner but - after the UK group's two profit warnings this year - the tables seem to have turned.

"My immediate reaction was that it was a poison pill. They seem to be doing anything not to be taken over by Warner," says one music industry official.

This is rejected by people close to EMI.

However, EMI's decision to drop copyright protection does make an acquisition by Warner more difficult, says one music industry executive.

"You can't have a merger between two companies where you have one company with a DRM-free strategy and the other which doesn't," says another.

Analysts were unsure yesterday what the agreement meant for EMI in terms of revenues. Alice Enders at Enders Analysis, the media research company, says as the consumer will be paying more for a high-quality DRM-free track, this should, theoretically, push up the wholesale price and hence the revenue for EMI.

However, it is unclear whether consumers would be attracted to a DRM-free track at a higher price even if it is billed as higher quality.

The other recording "majors" are sceptical about EMI's move and are more concerned about the long-term implications of removing copyright protection. "When people are stealing cars, you don't start taking the locks to stop that," remarks one.

All the big record companies have been experimenting with DRM-free tracks, but research about future revenue implications and consumer behaviour have been inconclusive, says one music company executive.

While the EMI agreement may have seemed a good PR move for Apple, as it is facing complaints from European consumer groups, the other music companies are irate that the agreement lets Apple off the hook from sharing its own copyright protection system Fair Play.

Apple has been under pressure to share Fair Play, but the latest deal puts the pressure back on other record groups to follow EMI's suit.