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The U.S. Department of Justice is proposing to come down hard on Apple after the company was found guilty of price fixing charges in July after a trial in U.S. District Court for the Southern District of New York.
U.S. Judge Denise Cote found that Apple had conspired with five book publishers to fix prices higher than those being charged by Amazon at the time while also forcing Amazon and other online book sellers to charge similar prices. The DOJ presented an overwhelming pile of evidence, including emails from then-CEO Steve Jobs setting up the conspiracy.
The Justice Department laid out its proposals for punishing Apple in a press release issued on Aug. 2. In that document, the government said that it was proposing that Apple be forced to terminate the agreements it had with the five major book publishers involved in the conspiracy and to cease making any other attempts to fix prices. The proposal would also prevent Apple from entering into any contracts that would prevent price competition for five years and it would prevent any retaliation against publishers that refused to sell books on Apple’s terms.
But there are other provisions that could prove particularly galling to Apple. The company must allow links to other book sources, including Amazon’s Kindle software and store. “To reset competition to the conditions that existed before the conspiracy,” the DOJ explained, “Apple must also for two years allow other ebook retailers like Amazon and Barnes & Noble to provide links from their ebook apps to their ebookstores, allowing consumers who purchase and read ebooks on their iPads and iPhones easily to compare Apple’s prices with those of its competitors.”
In addition to focusing on ebooks, the government is also proposing to keep an eye on Apple’s dealings in regards to other media. “Apple will also be prohibited from entering into agreements with suppliers of ebooks, music, movies, television shows or other content that are likely to increase the prices at which Apple’s competitor retailers may sell that content.” In other words, Apple’s sale of music and video through iTunes and the Apple music store is also restricted.
But just in case Apple doesn’t get the message, the DOJ is proposing that a court-appointed monitor be put into place within Apple “to ensure that Apple’s internal antitrust compliance policies are sufficient to catch anti-competitive activities before they result in harm to consumers.”
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The salary and expenses of the monitor would be paid for by Apple and the company would be required to hire an internal compliance officer who would report to Apple’s outside directors. The compliance officer would work with the court appointed monitor to ensure that Apple followed the law, and that Apple’s executives were properly trained in compliance.
While the proposed DOJ settlement doesn’t prohibit Apple from selling ebooks or other forms of digital information, it does place significant restrictions on how it can conduct those sales. If the court approves the DOJ remedies, Apple would not be allowed to set prices in a way that artificially raises ebook prices above prevailing rates. Because of the proposal to also monitor music and videos, it’s likely that Apple wouldn’t be able to act anti-competitive in any way when it comes to music and video pricing.
It’s also possible that Apple could be found liable for monetary damages on top of the restrictions being proposed by the DOJ. Such damages could be fines or even a requirement that Apple be required to refund money collected illegally from customers on overpriced ebooks. The hearing to determine the type, extent and any amount of damages is still pending. Apple could decide to settle with the government as the book publishers involved in the case did.
If implemented, the remedies will have some far-reaching effects. For example, Apple can no longer insist on its previously mandated profit margin of 30 percent, which could hurt stock prices even more than Apple’s recent performance has. Apple may be forced to allow in-app purchases of ebook, music and video content by sellers such as Amazon and Barnes & Noble—something that Apple had forced those sellers to stop.
Perhaps more serious over the next five year, Apple will have a government watchdog at its heels, monitoring all of its activities including how it sells products. While it’s not clear that this might limit Apple’s ability to demand specific retail prices on its products, it’s likely that close government scrutiny may limit that behavior.
On the other hand, the government’s proposed punishments would open ebook sales to greater competition again and anti-competitive agreements, such as Apple’s agency model, clearly wouldn’t be permitted. This might annoy book publishers who would rather keep prices up, but consumers overall would probably benefit. The same thing is likely to happen to other media sales including music and video, and if those prices go down that will be another bonus for consumers