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DOJ Calls For Apple to Let Rival Apps Link to Their eBookstores, Abandon Agency Pricing on eBooks

apple-rottenThe Dept of Justice and 33 state attorneys general have just published a proposed anti-trust settlement that it has offered to Apple, and it is almost everything that I could have hoped for.

The DOJ wants Apple to renegotiate existing contracts with book publishers, allow competitors to link from inside their iOS ebook apps to websites, and appoint an outside monitor whose job will be to make sure Apple complies with the settlement. The full letter from the DOJ is copied at the end of the post.

This is a very good day.

Now, this settlement doesn’t go as far as I would like, but it is a solid spanking. Apple is going to have to renegotiate all the ebook contracts (not just the ones with Apple’s 5 co-conspirators). That means that Apple will have to sign new contracts with everyone from Ingram/LSI to Smashwords. That’s going to throw their ebookstore into disarray for the next few months.

Apple is also going to have to avoid MFN contracts for all types of content, not just ebooks, for the next 5 years. Or at least that is what i think this sentence means:

Apple will also be prohibited from entering into agreements with suppliers of e-books, music, movies, television shows or other content that are likely to increase the prices at which Apple’s competitor retailers may sell that content.

Update: Nope. That is actually the no agency pricing clause. And it’s going to last for 5 years.

That too will have an interesting effect on the market, but that’s not the best part.

The DOJ wants Apple to allow Amazon, Kobo, and the other ebookstores to start linking from the apps to the ebookstores again. Apple took this feature away from Amazon et al in mid-2011 (after first trying to extort a 30% vig from the competing ebookstores). If this agreement goes through as is Apple is going to have to give up a significant market advantage. Apple will still be one of the few to have an ebookstore inside their app, but once Amazon et al can link to their ebookstores again Apple will face fierce competition again on the iPad and iPhone.

This last clause doesn’t go far enough, IMO. it really should include all types of media apps and not just ebookstores. Remember, music and video services (including everyone from Hulu to Pandora) were similarly affected by Apple’s attempted extortion. They were all forced to give up the ability to link to their websites by Apple, so they should all regain the ability, IMO.

Now that the tech giant has lost their court case and was convicted of anti-trust violations, this settlement will likely govern Apple’s content business for the next several years. Apple is not in a strong negotiating position, and if they don’t voluntarily agree to this settlement there is a very good chance that Judge Cote will order them to comply.


Remedy Would Require Apple to Terminate Agreements with Five Publishers; Provide for a Court-Appointed External Monitor; Allow Competitors to Provide Links from Their E-Book Apps to Their E-Bookstores

WASHINGTON — The Department of Justice and 33 State Attorneys General today submitted to the court a proposed remedy to address Apple Inc.’s illegal conduct, following the July 10, 2013, U.S. District Court for the Southern District of New York decision finding that Apple conspired to fix the prices of e-books in the United States. The proposed relief is intended to halt Apple’s anticompetitive conduct, restore lost competition and prevent a recurrence of the illegal activities.

“The court found that Apple’s illegal conduct deprived consumers of the benefits of e-book price competition and forced them to pay substantially higher prices,” said Bill Baer, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “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.”

The department’s proposal, if approved by the court, will require Apple to terminate its existing agreements with the five major publishers with which it conspired — Hachette Book Group (USA), HarperCollins Publishers L.L.C., Holtzbrinck Publishers LLC, which does business as Macmillan, Penguin Group (USA) Inc. and Simon & Schuster Inc. — and to refrain for five years from entering new e-book distribution contracts which would restrain Apple from competing on price. Under the department’s proposed remedy, Apple will be prohibited from again serving as a conduit of information among the conspiring publishers or from retaliating against publishers for refusing to sell e-books on agency terms. Apple will also be prohibited from entering into agreements with suppliers of e-books, music, movies, television shows or other content that are likely to increase the prices at which Apple’s competitor retailers may sell that content. To reset competition to the conditions that existed before the conspiracy, Apple must also for two years allow other e-book retailers like Amazon and Barnes & Noble to provide links from their e-book apps to their e-bookstores, allowing consumers who purchase and read e-books on their iPads and iPhones easily to compare Apple’s prices with those of its competitors.

Additionally, the Department of Justice is asking the court to appoint an external monitor to ensure that Apple’s internal antitrust compliance policies are sufficient to catch anticompetitive activities before they result in harm to consumers. The monitor, whose salary and expenses will be paid by Apple, will work with an internal antitrust compliance officer who will be hired by and report exclusively to the outside directors comprising Apple’s audit committee. The antitrust compliance officer will be responsible for training Apple’s senior executives and other employees about the antitrust laws and ensuring that Apple abides by the relief ordered by the court.

On April 11, 2012, the department filed a civil antitrust lawsuit in the U.S. District Court for the Southern District of New York against Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster, for conspiring to end e-book retailers’ freedom to compete on price by taking control of pricing from e-book retailers and substantially increasing the prices that consumers paid for e-books.

At the same time that it filed the lawsuit, the department reached settlements with three of the publishers — Hachette, HarperCollins and Simon & Schuster. Those settlements were approved by the court in September 2012. The department settled with Penguin on Dec. 18, 2012, and with Macmillan on Feb. 8, 2013. The Penguin settlement was approved by the court in May 2013. Final approval of the Macmillan settlement is pending before the court. Under the settlements, each publisher was required to terminate agreements that prevented e-book retailers from lowering the prices at which they sell e-books to consumers and to allow for retail price competition in renegotiated e-book distribution agreements.

The department’s trial against Apple, which was overseen by Judge Denise Cote, began on June 3, 2013. The trial lasted for three weeks, with closing arguments taking place on June 20, 2013. The court issued its opinion that Apple Inc. violated Section 1 of the Sherman Act on July 10, 2013. The court will hold a hearing on remedies on Aug. 9, 2013.

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Michael Anderson August 2, 2013 um 12:03 pm

Two things:
– First, your site *just* (as in, today) became unblocked for me at work! Yay.
– Second … 'extortion'? I think that is a bit heavy-handed. It is one thing with what they did with cartel, I mean 'agency' pricing, where they *knew* there was a 30% margin, and then demanded a 30% cut from Amazon, BN, Kobo, etc. THAT was patently anti-competitive.

But the reality is that Apple is the #1 supplier of customers, so why should they NOT get a cut of things sold through their platform? Again I think the 'how much' should be lower – think of how many millions they would have made if they allowed subscriptions at a reasonable 10% fee, for example.

If Apple cannot do this, then we must dismantle the business model for the entire video game industry. Steam collects per game sold, as does every other digital site. Microsoft charges a 'royalty' on every game playable on their system, and on and on. And we know Amazon collects a cut for movies and music and books and so on.

Nate Hoffelder August 2, 2013 um 12:21 pm

"Apple is the #1 supplier of customers"

Except Apple is not now and has never _actively_ done anything to serve up customers. They sold the hardware; they didn’t do any marketing, promotion, or anything else to drive customers to ebookstores.

And Apple’s behavior in early 2011 could well be described as "That’s a nice ebookstore you got there; shame if something happened to it". If that is not extortion then perhaps blackmail might be a better fit.

I’ll grant you that the current and historical conditions of the console market do tend to defeat my argument, but there’s a difference between Apple and gaming consoles. Apple decided after the fact that the ebookstores had to pay a vig or get out of iTunes. Game developers know what they are getting into before they begin.

fjtorres August 2, 2013 um 12:45 pm

Console vendors have not been convicted of antitrust violations nor have they used access to the consoles to force developers to support other businesses that belong to them. If Sony forced Disney to sell ebooks through their ebookstore as a precondition to be able to sell PS3 games through PSN, they too would be hearing from the feds.
Proven antitrust violators get different treatment from honest competitors.

Personally, I think a better remedy would to force Apple to divest iBooks, to sink or swim on merit, as a way to deny them their ill-gotten gains.

Nate Hoffelder August 2, 2013 um 1:02 pm

Also, console vendors don’t typically copy an existing game on their platform and then try to force the original game out the door. That’s kinda what Apple did (or at least threatened to do) with the 30% vig.

Nate Hoffelder August 2, 2013 um 12:58 pm

I need to amend this comment.

When I wrote that Apple was not actively marketing or promoting, I should have limited that to only refer to content in competing ebookstores. Apple is facilitating content sold via iTunes but that doesn’t include Kobo, Kindle, etc ebookstores.

And anyway, Apple let the ebookstores and other media services skirt Apple 30% vig for several years before dropping the hammer. That acceptance of the situation is another way that this situation differs from gaming consoles.

fjtorres August 2, 2013 um 2:15 pm

All the evidence out there is they did it because iBooks was being outsold on iOS by Amazon and Nook, and probably Kobo. Since the feds saw Apple’s internal docs, they know for sure.

Michael Anderson August 2, 2013 um 2:22 pm

I still can’t believe that in Q1’13 iBooks was listed at 15% share, second only to Amazon. Who is buying this stuff? After all the earlier crap I said I would never buy an iBook … and I have kept to my word.

Michael Anderson August 2, 2013 um 1:52 pm

Good points from you and fjtorres.

And BELIEVE me – I think Apple has behaved abhorrently in this whole thing. I just worry about the unintended consequences of potential outcomes.

As it stands now, Apple is #2 with 15% of the market. BN is dying … and the entire rationale that started the discussion was the monopoly that Amazon had … which the DOJ is seeking to forcibly reinstate.

fjtorres August 2, 2013 um 2:26 pm

Assuming Apple has 15% share, who did it come from?
There is no evidence Amazon lost anything. There *is* evidence Nook lost share, Kobo was stalled, and Fictionwise and BooksOnBoard were killed.
All the conspiracy did was put money in Apple’s pockets and make Amazon stronger, with fewer competitors.
The feds simply don’t have many options to restore the competitive landscape of 2009.

fjtorres August 2, 2013 um 12:06 pm

Apple should consider that if they refuse the deal, the Judge can order them to divest the ebookstore.
Forcing them to allow in-app ebook sales is a half step towards restoring the status quo ante.
So much for crowing about using their appstore power to force Random House to do business with ibooks.
Classic tying and an antitrust violation unto itself.

Nate Hoffelder August 2, 2013 um 2:34 pm

I think an argument could be made for forcing Apple to divest the content division entirely. Splitting up a company is a classic anti-trust solution, so why not take the content away and remove any possible future temptation for further shenanigans?

fjtorres August 2, 2013 um 3:16 pm

My best case scenario.
We’ll see if the judge believes in the eleventh commandment:
"Thou shalt not get away with it."

Oh My God August 2, 2013 um 12:17 pm

LOL, Apple should just kick Amazon’s bookshelf out of the app store. What can Elmer Holder do about that??

Nate Hoffelder August 2, 2013 um 12:24 pm

Sue Apple again, and win.

fjtorres August 2, 2013 um 12:55 pm

Even better; Amazon could sue Apple for restraint of trade and, with Apple a convicted antitrust violator, likely get summary judgment on day one. A few hundred million would change hands. 🙂

Getting convicted on antitrust is big bad news; in any related case, the convict is presumed guilty to start with.
For example, if B&N were willing to document their ebook sales pre- and post- conspirscy they could easily win a few hundred million for damages.

Nate Hoffelder August 2, 2013 um 3:18 pm

If that is true then whoever ended up owning the remains of BoB could probably make a nice chunk of change by suing Apple.

Oh My God August 2, 2013 um 3:23 pm

Love the anti-Apple wet dreams. Soon you’ll wake up to the harsh reality — Apple makes profits and Amazon doesn’t. How will you respond to the harsh reality?

Michael Anderson August 2, 2013 um 3:54 pm

Re: 'Oh My God' (couldn’t embed further replies):

Seriously? That is like talking about some pop singer having little to no musical talent, and getting a retort of 'yeah, but they have more money than you'. Um, yeah, totally irrelevant.

Apple is very, very rich. Apple is ALSO very, very paranoid – and they have made some very poor business choices based on that extreme paranoia. And while they make great products and software, some of those decisions actually hurt their own customers in the end. For me THAT is the harshest reality.

fjtorres August 2, 2013 um 5:42 pm

Apple’s colluding ways screwed over their *own employees*.
Right up to the management staff.
Real mart, that, no?

fjtorres August 2, 2013 um 5:52 pm

Nate, do you remember the flood of antitrust-based suits Microsoft had to field after being found to *not* have harmed Netscaped in the least? Companies that had nothing to do with browsers, the internet, or Operating sytems were suing for a chunk of Microsoft’s cash kitty.

They were even sued ten years later by the owners of the Word Perfect name over the fact that, when Word Perfect refused to support Windows in the early 90’s and then saw all their customers go to MS word when they migrated to Windows instead of OS/2, NextSTEP, UNIX, or AmigaDOS, all of which Worrd Perfect chose to support intead of Windows.

Apple is in for some interesting times.

BTW, this is what they think is a fitting punishment for conspiring against consumers:

Apple said, it should place "reasonable limitations on Apple’s ability to share information," prohibit agreements with publishers from having "most favored nation" pricing pacts that give Apple the best price, and "reasonable antitrust training obligations for Apple, lasting a reasonable term."

And that’s it.
No fines, no restitution, and they get to keep all the market share they garnered by breaking the law. Basically, Apple wants the feds to blow them a kiss and keep on pulling more of the same crap.

Nate Hoffelder August 2, 2013 um 5:53 pm

I saw that.

I’m working on a post.

Sherri August 2, 2013 um 1:58 pm

Remember, Apple also violated antitrust on the employee no-poaching agreement they set up with other high tech companies. That might be another reason DOJ is coming down hard here: a pattern of behavior.

Michael Anderson August 2, 2013 um 2:09 pm

'Violated antitrust'? I didn’t see that – could you share links? There were concerns from the judge about whether to award class action status, which was denied. And the case was settled out of court. ALSO, this was 7 companies including Google, Intel and so on.

That is also a different thing – employees in tech companies are regularly required to sign 'do not compete' clauses, which prevent them from working for a direct competitor for a time period after leaving the first company.

What was alleged was that rather than say, Apple having internal 'do not compete', Google agreed not to hire in a way that would violate those employee agreements. People violating those agreements have regularly been found guilty and gotten into some big troubles.

But the case was the potential for limiting *legal* mobility and therefore limiting increased pay opportunities inherent with the 18-month job-hops often found in Silicon Valley.

Sherri August 2, 2013 um 2:18 pm

DNC clauses are not legal in California, so it wasn’t a matter of avoiding those. Apple (and the other companies) settled with the DOJ and agreed not to enter into no-poaching agreements:

Michael Anderson August 2, 2013 um 2:25 pm

Cool – thanks for the link. Didn’t realize they were illegal in CA.

fjtorres August 2, 2013 um 2:34 pm

Two separate cases: they settled the federal antitrust case, are still facing litigation from the wronged employees.
Because they settled instead of going to court, the employees have to first prove they were individually harmed.

Paul August 2, 2013 um 2:54 pm

I’m still a bit perplexed over why Apple is getting such a harsh response, yet other players in the ebook market do not. Surely Amazon deserves a close look for having such dominate market share? If this deal goes ahead, then the DoJ is basically locking in a monopoly for the forceable future and reducing choice.

I think Apple will successfully defend itself against the in-app purchases by pointing out that it increases the risk of spam and fraud, just like on android devices.

Michael Anderson August 2, 2013 um 2:57 pm

Amazon *earned* its market share through pricing – they were willing to take a loss to build up the ebook market. Others were charging $25 for ebooks if you recall. At $9.99 (which is ironic given Apple’s MP3 album history), people started buying. And when you look at the pricing flow of hardcovers and paperbacks, a single, stationary price makes little sense.

I am not saying Amazon is not a bully, there is plenty of evidence of that. But there is a distinct legal difference between organic growth and monopolistic practices.

Jayne August 2, 2013 um 3:04 pm

Whatever Amazon’s market share is/was is irrelevant.

If you’re going to violate anti-trust laws by colluding to fix prices at the expense of consumers, you deserve this and maybe more.

The end does not justify the means.

fjtorres August 2, 2013 um 3:22 pm

Large market shares are not illegal.
Discounting is not illegal.
Using 21st century tech to compete against 19th century business models is not illegal.
All the above together is not illegal.

Nate Hoffelder August 2, 2013 um 3:27 pm

"Using 21st century tech to compete against 19th century business models"

That is the simplest and best summation of why Amazon won in ebooks.

It’s also not illegal to invest in a tepid market for 7 years before launching a platform that caused the market to explode. Remember, Amazon was in ebooks since 2000.

Ravi August 3, 2013 um 10:36 am

Let’s not forget that Amazon earned and continues to earn their ebook market share through excellent customer service, not just pricing. From what I recall, B&N (who otherwise would be a stronger competitor for Amazon) is particularly bad on that front.

A Reader August 3, 2013 um 11:02 am

This reminds me of the breakup of Bell Telephone decades ago. Consumers wanted more choice because they thought the big Bell monopoly was ripping everybody off and limiting competition in the marketplace. Now Apple is the big name and everybody wants to attack them for doing what businesses do…they make contracts with other companies in ways that benefit them. Wal-Mart, for example, has a history of price-fixing in a way by forcing manufacturers to accept what Wal-Mart wants to pay, with the end game for Wal-Mart being to control prices and gain market share by putting smaller businesses out of business who can’t create the small model for themselves and survive. The breaking up of Bell really hasn’t worked too well for most customers. More competition, but nonetheless, prices continue to rise. Call me cynical perhaps…

Thomas August 3, 2013 um 3:45 pm

Unless I’m mistaken, the restrictions on Bell were removed decades ago and AT&T had since bought back a lot of their subsidiaries. Also, telcos are legal monopolies, in that they contract with governments to supply service to given area. That doesn’t have anything to do with the retail business.

Second, there’s a big difference between Walmart’s actions (using their position as a large retailer to force suppliers to lower prices) and Apple’s (conspiring with five publishers to raise prices on ebooks and require all other retailers to sell for that price).

Nate Hoffelder August 3, 2013 um 4:02 pm

I think what happened was that Verizon bought up other Baby Bells and reconstituted about 80% of AT&T. And then they changed their name, I think.

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