Punishment Would Include Music, Movies and TV Content Sold on iTunes
BUSINESS Updated August 2, 2013, 7:13 p.m. ET
Punishment Would Include Music, Movies and TV Content
Sold on iTunes
By CHAD BRAY, IAN SHERR and JEFFREY A. TRACHTENBERG
CONNECT
Apple Inc.'s e-book problem is spilling over into its
other media businesses.
After winning last month an e-books antitrust suit
against Apple, the Justice Department on Friday asked a federal judge to limit
Apple's influence in the publishing market and give the government oversight of
the iTunes Store and App Store.
DOJ Remedies Pave Way for E-Book Retailers to Link Their
Stores From Apple Devices
The government proposals, if accepted, could give music,
television-show and content owners more leverage in negotiations with a company
that has been an aggressive bargainer in opening up traditional media to
digital distribution.
Apple is currently negotiating with owners of video
programming about potential new devices and services for the living room. After
negotiating with record labels, it recently announced a new music streaming
service, iTunes Radio.
The government seeks to prohibit Apple from reaching
agreements with media companies that increase the prices at which Apple's
rivals sell e-books, music, TV shows or movies.
Apple objected strongly to the proposals, calling them a
"draconian and punitive intrusion into Apple's business, wildly out of
proportion to any adjudicated wrongdoing or potential harm," in a court
filing Friday.
Last month, U.S. District Judge Denise Cote in Manhattan
found that Apple had colluded with five major U.S. publishers to drive up the
prices of e-books. The remedies proposed Friday underscore the risks Apple took
when it gambled with a trial after the publishers settled similar civil
allegations. The company has said it plans to appeal.
The trial earlier this summer revolved around the steps
Apple took to gain a foothold in e-books when it created what it called
iBookstore. Apple still makes the bulk of its revenue from products such as the
iPad and iPhone, but the iTunes Store, which houses the iBookstore and App
Store, is a strategically important area that accounts for about 10% of the
company's revenue.
The Justice Department is seeking a five-year prohibition
on new e-book distribution contracts that would restrain Apple from competing
on price.
Rival e-book sellers also would be allowed for a two-year
period to sell books to Apple users via e-books apps that are distributed
through Apple's App Store, by providing a link to their websites within their
apps. Apple normally charges a 30% fee for content purchased within an app,
something e-book makers have avoided by simply not selling books within their
apps.
The Justice Department also proposed a court-appointed
monitor of Apple's compliance with its proposed final judgement, which would be
in effect for ten years.
"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," said Bill
Baer, assistant attorney general in charge of the Department of Justice's
Antitrust Division.
In its response, Apple accused the Justice Department of
overreaching in a variety of ways—including by attempting to change how it
makes deals with all e-books publishers, not just the ones who were defendants
in the price-fixing case.
Apple also said the Justice Department proposal would
effectively change the rules for its App Store, which Apple said wasn't a focus
of a case that centered on its iBookstore.
It complained the agency wants to "regulate every
one of Apple's content offerings," adding that there is no evidence to
support "bridling any content businesses other than the iBookstore."
The company also called the recommendation of a
court-appointed monitor to review its business as "wholly unjustified by
law or fact."
Apple argued the proposals would give advantages to
longtime e-book rival Amazon.com Inc. Allowing Amazon consumers to purchase
books from within apps on Apple devices without paying a commission would
improperly "protect" the online retailer, promoting "a
competitive imbalance and serve to entrench Amazon's dominant position."
The Cupertino, Calif., company said the court should
limit itself to remedies of the sort already struck with publishers that were
plaintiffs in the case. It recommended that at most, the court should limit
Apple's ability to share information and enter into specialized pricing
agreements with the publishers from the case. Apple also said it could undergo
antitrust training for "a reasonable term."
Justice Department prosecutors argued that Apple used
publishers' dissatisfaction with Amazon's aggressive e-book discounting to
shoehorn itself into the digital-book market when it launched the iPad in 2010.
Apple's proposal: Let publishers set prices themselves. That led to Amazon
losing the ability to price most e-book best sellers at $9.99, causing prices
to rise.
In her ruling last month, Judge Cote said the evidence
was clear that Apple, despite its claims that it negotiated fiercely and
separately with each publisher, was at the center of the conspiracy.
When it entered the e-book market in 2010, Apple agreed
to shift to a so-called agency model in which publishers, rather than
retailers, set the price of e-books. As part of its deals with the publishers,
Apple received a 30% commission on each book sold and the publishers had to
match the price of Amazon or other competitors if the competitor's price was
lower.
Because Apple was found liable for violating U.S.
antitrust laws, it also faces a separate trial on damages in a lawsuit against
the company brought by 33 state attorneys general, who are seeking to recover
money on behalf of consumers who paid higher prices for e-books. Apple also
faces a private class-action suit alleging price-fixing.
Write to Chad Bray at chad.bray@wsj.com, Ian Sherr at
ian.sherr@dowjones.com and Jeffrey A. Trachtenberg at
jeffrey.trachtenberg@wsj.com
A version of this article appeared August 3, 2013, on
page B1 in the U.S. edition of The Wall Street Journal, with the headline: U.S.
Seeks Oversight of Apple.
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