DOJ to Apple: Your punishment must be more severe

August 2, 2013

(Photo by Sean MacEntee)

It was bad enough for Apple that a federal judge recently found it guilty of conspiring to raise e-book prices on consumers. But the Justice Department won't be satisfied until Apple fully pays for its misconduct — and that means applying much greater scrutiny to just the kinds of deals that Apple's pinned its future on.

Here's the punishment the Department of Justice believes is appropriate given Apple's misconduct:

Under the department’s proposed remedy, Apple will be prohibited from again serving as a conduit of information among the conspiring publishers or from retaliating against publishers for refusing to sell e-books on agency terms.  Apple will also be prohibited from entering into agreements with suppliers of e-books, music, movies, television shows or other content that are likely to increase the prices at which Apple’s competitor retailers may sell that content.  To reset competition to the conditions that existed before the conspiracy, Apple must also for two years allow other e-book retailers like Amazon and Barnes & Noble to provide links from their e-book apps to their e-bookstores, allowing consumers who purchase and read e-books on their iPads and iPhones easily to compare Apple’s prices with those of its competitors.

Under this approach, Apple still gets to sell e-books on an agency model whereby it takes a 30 percent cut of all e-book sales made through the iBooks store. This is the same model that animates the App Store. But notice what Apple won't be able to do — set up deals with broadcasters, cable companies, the record industry, Hollywood and producers of "other content" that might cause consumers to pay more. Every time Apple wants to sign a new contract with one of these providers, it'll have to demonstrate to an auditor that it won't lead to higher prices.

Arguably, Apple should be doing this anyway. But making it so that Apple has to jump through this hoop over and over will make things more cumbersome for Apple to negotiate new deals.

Take the company's rumored entry into the television world. The New York Times has reported that Apple intends to "collect a fee from distributors in exchange for enhancing their television service, and in that way, theoretically, make subscribers more likely to keep paying for cable." The DOJ's proposed remedy doesn't jeopardize that plan (if it is, in fact, their plan). But it might make lining up all the necessary ducks a trickier proposition for Apple.

The arrangements underlying Apple's new online radio service are slightly different, but there's no reason to think that the company's contracts with major labels would escape scrutiny.

Unless a softened version of the penalty is settled on, this could affect Apple's business for a long time to come.

"When you’re going to launch a platform, you want to have stuff on it," Randall Picker, an antitrust scholar at the University of Chicago, told my colleague Timothy Lee last month. "An e-book store with five books is not very attractive. They’re going to want to enter at a certain scale."

Brian Fung covers technology for The Washington Post.
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