In the Apple ebooks case, the federal government wants to change the way that Apple does business — not just for ebooks, but in all content markets.
The DOJ on Friday filed a revised proposed remedy for Apple (s AAPL) in the ebook case, following a hearing earlier this month with a judge and counsel for Apple. The proposal relates to a judge’s decision in July that Apple had conspired with publishers to set ebook prices. (Apple has vowed to appeal.)
The new proposed punishment (embedded below) might not seem all that different from the original proposed punishment, in which the DOJ wanted Apple to drop in-app purchasing restrictions for competitors like Amazon (s AMZN) and aimed to restrict publishers from using agency pricing for five years instead of two. But it devotes more attention to Apple’s policies for in-app purchases and to the way that Apple sells content in general.
Steve Jobs: “Let’s force them to use our far-superior payment system”
In its revised remedy, the DOJ delves deeply into its criticism of Apple’s in-app purchasing policy, which it now claims Apple changed in 2011 “to retaliate against Amazon for competitive conduct that Apple disapproved of.” As background, in 2011, Apple changed in-app purchase rules to require that any content sold through apps must also be sold through the iTunes Store, and forbid publishers and retailers from sending users to websites outside their apps to make purchases. As a result, Amazon removed the Kindle Store from its app and retailers like Barnes & Noble (s BKS) and Kobo followed suit.
These rules applied to all types of digital content — including magazines and newspapers — not just ebooks. But, the DOJ argues, they were primarily put into place “to make it more difficult for consumers using Apple devices to compare ebook prices among different retailers, and for consumers to purchase ebooks from other retailers on Apple’s devices.”
At the hearing earlier this month, the DOJ argues, “Apple misrepresented the factual circumstances surrounding this matter, including how the App Store operated and operates…It simply is not true that Apple receives a 30 percent commission from all retailers for all goods sold through apps.” It uses the examples of shoes at Zappos and physical books at Amazon — seemingly arguing that Apple should treat physical and digital goods in the same way.
The DOJ includes Apple’s in-app purchase regulations as an exhibit, and also includes a Steve Jobs email from 2010.
The DOJ wants huge changes in the way the App Store sells content
The DOJ is still trying to regulate Apple’s sales of ALL types of digital content, not just ebooks: It wants the retailer to abandon MFNs or any agreements that would “increase, fix or set the price at which other ebook retailers or retailers of other forms of content can acquire or sell ebooks or other forms of content.” This includes “music, other audio, movies, television shows, or apps.”
This broad-reaching rule, the DOJ says, is “both necessary and prudent to prevent future violations of the antitrust laws.” And in a footnote, it claims the fact that Apple has protested it “reasonably leads to concerns regarding what Apple is doing, and plans to do, in those other content markets, like music and television.”
Staggered negotiations with ebook publishers
The DOJ wants to require Apple to negotiate with publishers at staggered times, rather than all at once. That was a plan that Judge Denise Cote, the federal judge overseeing the case, had suggested at the hearing earlier this month. It outlined a schedule for when these negotiations would take place:
The DOJ also slightly softened a proposed requirement in its previous proposal, which had aimed to prohibit agency pricing on ebooks for five years — despite the fact that the publishers have already reached settlements with the DOJ that would prohibit agency pricing for just two years. (The publishers, not surprisingly, protested the DOJ’s new suggestion, arguing it did more to punish them than to punish Apple.) In the new proposal, the DOJ outlined a schedule for when publishers could re-negotiate agency contracts with Apple:
- Apple and Hachette: 24 months “after the effective date of this final judgment”
- HarperCollins: 30 months
- Simon & Schuster: 36 months
- Penguin: 42 months
- Macmillan: 48 months
Publishers are still likely to hate this proposal, as it would still significantly extend the amount of time that they are required to allow Apple — and thus other retailers — to discount their books.
HarperCollins, for instance, was the first publisher to allow discounting of its ebooks: It’s done so for nearly a year now, meaning that it has just one more year to go before it can renegotiate retailer contracts. But the DOJ’s new proposed remedy would likely tack at least another year onto that waiting period.
Penguin and Macmillan, which were the last publishers to reach settlements with the DOJ, are punished with particularly long waiting periods: Macmillan would have to wait four years to renegotiate contracts under this proposal.
For the most part, the DOJ says, its original proposed punishment should stand
The DOJ uses most of the filing to explain why it thinks its original proposed punishment was correct. In one concession, it allows that the injunction could last for five years, instead of the ten it originally proposed, but wants to retain the right to extend the injunction in one-year increments if needed, for up to five additional years, because “five years might not be enough time to restore competition to the e-books market and to ensure that Apple changes its troublesome business practices to prevent a recurrence of the illegal conduct.”
Finally, the DOJ insists that Apple needs an external monitor, rather than the “vigorous in-house antitrust enforcement program” suggested by Judge Cote, to make sure that it is adhering to the terms of whatever final punishment it ultimately receives. The DOJ argues that “Apple’s in-house enforcement program will be insufficient to change the corporate culture, and that the company cannot be left to solely police itself.”