Apple E-Book Case: Cure Will Hurt

Aug 02, 2013 (11:08 AM EDT)

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A week before the U.S. District Court for the Southern District of New York considers remedies for its finding last month that Apple conspired to fix ebook prices, the Department of Justice and 33 State Attorneys General have filed a proposal to address the company's conduct.

The proposal strikes at the heart of Apple's power over its platform. It requires Apple to rewrite the rules under which it sells ebooks. Presently, Apple's App Store Review Guidelines state that apps linking to external purchasing or subscription mechanisms, such as a "Buy" button, will be rejected.

The DoJ wants to rewrite those rules, at least for two years. Its proposal suggests that Apple be required to treat ebooks like any other app, except that for two years, it must allow ebook sellers to provide a "Buy" button or a link in their ebooks that points to their own website or ebook store without any compensation. This denies Apple the opportunity to insist on a 30% cut of revenue arising from commercial transactions that originate in the ebooks it distributes.

[ Learn more about the court's original decision. Read Apple Conspired To Fix E-book Prices, Court Rules. ]

The proposal also calls for: 1) an end to Apple's agreements with the five major publishers named in the litigation -- Hachette Book Group (USA), HarperCollins Publishers, Holtzbrinck Publishers (Macmillan), Penguin Group (USA) and Simon & Schuster; 2) a five-year prohibition on entering new agreements with publishers that limit Apple's ability to compete on price or that give Apple "most-favored nation" terms; 3) a prohibition on retaliation against any ebook publisher that refuses to enter an agreement with Apple about the terms of ebook sales; 4) a prohibition on conveying information through ebook publisher negotiations to another ebook publisher; 5) a prohibition on agreements that would be likely to increase the price at which ebook retailers or content vendors can acquire ebooks or other digital content; and 6) a prohibition on agreements with any ebook retailer that represent price fixing.

More onerous still, particularly for a company as compartmentalized and secretive as Apple, the proposal calls for the court to appoint an External Compliance Monitor "at the cost and expense of Apple" to ensure that Apple complies with its obligations. This person will have the power to hire additional consultants, to interview Apple personnel informally or on the record, with notice and without interference, and to "inspect and copy any documents in the possession, custody or control of Apple."

Apple did not respond to a request for comment. Previously, a company spokesman rejected the court's finding and insisted it will continue to fight.

Apple cannot be pleased that that DoJ wants to punch a hole in its walled garden, which is already under siege from Amazon: The online retail giant recently updated its Kindle app to allow users to download free ebook samples that include the "Buy" link that Apple prohibits within apps it distributes directly through its iTunes App Store, like the Kindle app.

In the event Apple cannot convince the court to adopt different settlement terms or cannot reverse the court's finding on appeal, the company will be humbled -- but all is not lost. Apple only has to include links to competing ebook stores for two years, after which it can presumably return to a more restrictive regime. However, if providers of ebook apps decide not to submit new updates for Apple's approval after the two-year free-for-all expires, those apps will remain in the App Store. To be rid of them, Apple will be forced to endure the scrutiny and media attention that will come with an active purge of offending apps.