Apple battling U.S., states over proposed e-book limits

NEW YORK Fri Aug 2, 2013 7:00pm EDT

The Apple logo is pictured at the company's flagship retail store in San Francisco, California January 23, 2013. REUTERS/Robert Galbraith

The Apple logo is pictured at the company's flagship retail store in San Francisco, California January 23, 2013.

Credit: Reuters/Robert Galbraith

NEW YORK (Reuters) - Apple Inc is headed for a showdown with the U.S. government and dozens of states, which on Friday urged that tough new restrictions be imposed on the company for illegally conspiring to raise e-book prices.

The changes proposed by the U.S. Department of Justice and 33 U.S. states and territories are designed to stop Apple from committing further antitrust violations after U.S. District Judge Denise Cote on July 10 said Apple had a "central role" in a conspiracy with five major publishers to raise e-book prices.

"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," said Bill Baer, head of the Justice Department's antitrust division.

Apple is fighting back. In a court filing, it called the proposed injunction a "draconian and punitive intrusion" into its business that would hurt consumers and competition, and that it was "wildly out of proportion."

"The resulting cost of this relief - not only in dollars but also lost opportunities for American businesses and consumers - would be vast," it said.

Cote will weigh both the arguments at an August 9 hearing in her Manhattan courtroom. A damages trial might follow.

Despite Apple's protests, analysts have said the bigger issue for the Cupertino, California-based company in this case might be damage to its reputation, not financial harm. Amazon.com Inc commands about 65 percent of the U.S. e-books market, while Apple's share has been estimated in the single digits.

LIMITS ON DEAL MAKING

The government's plan, which still needs court approval, would require that Apple end its contracts with the five publishers and be banned for five years from entering contracts that would effectively the raise prices of e-books sold by rivals.

The publishers included Lagardere SCA's Hachette Book Group Inc, News Corp's HarperCollins Publishers LLC, Pearson Plc's Penguin Group (USA) Inc, CBS Corp's Simon & Schuster Inc and Verlagsgruppe Georg von Holtzbrinck GmbH's Macmillan. All settled with U.S. regulators.

Apple would also be blocked from cutting deals with providers of movies, music and TV programs for its iPad tablets and iPhones that would likely increase the prices at which rivals might sell such content. It would also require providers to lower prices for Apple if they lower them for rivals.

Officials also want to make it easier for consumers to compare e-book prices by requiring Apple for two years to let Amazon, Barnes & Noble Inc and other rivals provide links to their own stores within their iPad and iPhone apps.

The proposal should solidify online retailer Amazon.com Inc's dominance in the e-books market.

The DOJ proposal "hands Amazon yet another win," said Mark Coker, founder of Smashwords, an e-book publisher and distributor that works with Apple, Barnes & Noble, Sony and others. "Why isn't the DOJ forcing Amazon to play fairly? This is the question the publishing industry wants answered."

"Apple brought much-needed competition to the e-book market and now the government is trying to undermine them."

Albert Greco, a book-industry expert at the business school of Fordham University, said the remedy proposed by the department of justice "does not address the long term issue of book pricing in the United States."

While the trial was fair, "I am not sure they looked at the book publishing industry in much detail," he said, adding that it is unclear how it will impact the industry broadly.

Under the proposal, Apple would also be required to hire a full-time internal antitrust compliance officer and employ a court-appointed external monitor to ensure its compliance with antitrust law.

Government officials said the changes would permit Apple to compete "vigorously and lawfully" in the e-books market.

Apple countered that the changes seek unnecessary relief for harm already remedied under the settlements with the publishers and impose "broad, invasive, and vague" requirements unrelated to Cote's findings. It urged Cote to reject the injunction entirely or approve a "narrower and more modest" alternative.

"APPLE SEIZED THE MOMENT"

Federal and state officials accused Apple of conspiring with the publishers in late 2009 and early 2010, as the iPad was being launched.

They said the conspiracy caused some e-book prices to rise to $12.99 or $14.99 from the $9.99 that Amazon charged.

Evidence damaging Apple's case included emails from Steve Jobs, its chief executive, that the officials said reflected a desire to boost prices.

"Taking advantage of the publisher defendants' fear of and frustration over Amazon's pricing," Cote concluded, "Apple seized the moment and brilliantly played its hand."

In their settlements, the publishers agreed to pay more than $166 million for consumers' benefit. None admitted wrongdoing.

The case is U.S. v. Apple Inc et al, U.S. District Court, Southern District of New York, No. 12-02826.

(Reporting by Jonathan Stempel in New York; Additional reporting by Diane Bartz in Washington, D.C. and Poornima Gupta in San Francisco; Editing by Lisa Von Ahn and Andre Grenon)