Justice Department Seeks Oversight of Apple's iTunes Store
Punishment Would Include Music, Movies and TV Content Sold on iTunes
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.
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.
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