Justice Department proposes sweeping punishments against Apple

August 2, 2013

The Justice Department on Friday proposed sweeping punishments to Apple for illegally conspiring with publishers to lift ­e-book prices, asking a federal judge to pry open the firm’s lucrative apps store for competitors and keep a close watch on its practices in movies, music and other business lines.

If the government’s recommendations are adopted, an iPhone or iPad user could directly buy ­e-books from the Amazon Kindle or Barnes and Noble Nook apps — a practice now blocked by Apple.

Apple would also be forced to scrap current contracts it holds with five major book publishers, and it would be barred from entering new contracts that artificially control prices.

The DOJ went further to say Apple would be barred from similar agreements with suppliers of “music, movies, television shows or other content that are likely to increase the prices at which Apple’s competitor retailers may sell that content,” Justice said in a news release.

For 10 years, Apple would house a court-appointed monitor to make sure the firm follows through on court remedies.

Apple fought back, saying Friday that the DOJ’s proposals were too heavy-handed. The company vowed to appeal the July decision in the U.S. District Court of the Southern District of New York that found Apple guilty of conspiring with major book publishers to set new prices for e-books. The court found that Apple’s arrangement was designed to force its dominant competitor, Amazon, to lift its prices for digital books. The publishers settled with the Justice Department, which filed its suit in April 2012.

Some analysts expect Apple to take the case to the U.S. Supreme Court.

The Silicon Valley giant’s determination to pursue the case shows how damaging the government’s action can be to Apple as it expands its iTunes business to videos, streaming radio and other services, analysts said. About 10 percent of Apple’s revenues come from its iTunes store, and executives have aggressively pushed for deals with music labels and Hollywood studios to build the business that now competes with Hulu, YouTube, Amazon’s streaming video service and Netflix.

At the same time, analysts said the DOJ’s strong proposals highlight a desire by the Obama administration to more closely scrutinize Apple and other Web companies in the burgeoning market for consumer mobile services.

“The court found that Apple’s illegal conduct deprived consumers of the benefits of e-book price competition and forced them to pay substantially higher prices,” said Bill Baer, assistant attorney general in charge of the DOJ’s antitrust division. “Under the department’s proposed order, Apple’s illegal conduct will cease and Apple and its senior executives will be prevented from conspiring to thwart competition in the future.”

In 2011, Justice said, Apple blocked direct book purchases from Kindle and other competing apps. The company receives 30 percent of revenues from e-book purchases on the iBookstore but not through competitors’ popular apps. Today, if iPhone or iPad users want to download a book such as Reza Aslan’s “Zealot” on the Kindle or Nook app, they would have to do so through a desktop computer or through a cumbersome process via mobile Web browser.

Justice said a mandate to link to competitors in the app store would restore competition.

“This provision is intended to reset competition among trade ­e-book retailers and deny Apple the benefits of the conspiracy,” Justice wrote in its filing to District Court Judge Denise Cote.

Many of the proposed remedies were expected, but Apple argued that both forcing it to link to competitors and reaching into its contracts with movie, music and television suppliers goes too far.

The proposal “regulates areas of Apple’s business, like the app store and Apple’s relationships with providers of content other than e-books, which bear no relation to the wrongdoing alleged in this case,” Apple’s attorneys argued in their filing to the court. “These overbroad and vague terms violate principles of equity and antitrust law, as well as Apple’s constitutional rights to fair notice of judicial penalties.”

Antitrust experts said it is not unusual for government actions to include remedies that go beyond the specifics of the initial case.

“The policy of Apple’s iTunes business is not at issue in the litigation, but I don’t want to suggest that it is out of bounds,” said Scott Hemphill, a professor at Columbia University Law School. “Here, the DOJ has asserted that price competition has been deeply disadvantaged by Apple’s and the publishers’ conduct and they see the apps proposal as a way to jump-start and restore competition where it was stopped for a while.”

The judge will evaluate the proposal by Justice on Aug. 9, as well as Apple’s counter-arguments.

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Cecilia Kang is a staff writer covering the business of media and entertainment.
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