Apple Calls U.S. Proposal for E-Books Order Draconian

Apple Inc. (AAPL) called the U.S. Justice Department’s proposal for a court order regulating the company’s sale of electronic books “draconian and punitive.”

The federal government and 33 states submitted the proposal today in U.S. District Court in Manhattan. They asked the judge who ruled that Apple conspired to fix prices of e-books to order the company to cancel existing agreements with five publishers. The proposal also called for the court to appoint someone to monitor antitrust compliance at Apple for 10 years.

“Plaintiffs’ proposed injunction is a draconian and punitive intrusion into Apple’s business,” the company responded in a court filing. “Plaintiffs propose a sweeping and unprecedented injunction as a tool to empower the government to regulate Apple’s businesses.”

The government’s proposal would require Apple to find a new way to do business with publishers, and might affect its sale of music and other media as well. Sales of e-books, music, movies and software and services were $12.9 billion in 2012, 8.2 percent of Apple’s total revenue. Apple introduced e-books in 2010 to boost the appeal of the newly unveiled iPad tablet as a reading device.

“From a financial standpoint, this means nothing for Apple,” John Bright, an analyst at Avondale Partners LLC, said in an interview. “Strategically speaking, it is a setback. I think Apple would now have to find different work-around solutions for pricing. They would use the same publishers but they would have to negotiate different solutions.”

Photographer: Scott Eells/Bloomberg

A digital book is displayed on an Apple Inc. iPad for a photograph in New York. Close

A digital book is displayed on an Apple Inc. iPad for a photograph in New York.

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Photographer: Scott Eells/Bloomberg

A digital book is displayed on an Apple Inc. iPad for a photograph in New York.

Damages Trial

U.S. District Judge Denise Cote, after a nonjury trial in Manhattan, ruled July 10 against Apple. The company, based in Cupertino, California, now faces another trial on damages.

The proposal submitted today needs court approval to become effective. A hearing is scheduled for Aug. 9.

“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,” Bill Baer, the assistant attorney general in charge of the antitrust division, said in a statement.

“The idea behind this proposal would certainly make the e-book industry more competitive,” Bright said. “By definition, increased competitiveness in an industry leads to lower prices.”

Bright has a market outperform rating on Apple’s shares, the equivalent of a buy, and a $600 target price. Apple rose 1.3 percent to $462.54 at the close in New York.

U.S. Suit

The U.S. sued Apple and five of the biggest publishers in April 2012, claiming that the technology company pushed them to allow it to sell digital copies of their books under a model that raised prices and harmed consumers.

Under that so-called agency model, publishers, not retailers, set book prices, with Apple getting 30 percent. Amazon.com Inc., the largest seller of e-books, uses a wholesale pricing model, in which the retailer sets the price. The U.S. claimed that the conspiracy between publishers and Apple was designed to stop Amazon from selling best-selling e-books for as little as $9.99.

The publishers -- Verlagsgruppe Georg von Holtzbrinck GmbH’s Macmillan unit, CBS Corp. (CBS)’s Simon & Schuster, Lagardere SCA (MMB)’s Hachette Book Group, Pearson Plc (PSON)’s Penguin unit and News Corp.’s HarperCollins -- settled with the government.

‘Already Remedied’

Apple said in its filing that the government’s proposal to regulate the company’s business with publishers is unnecessary because antitrust concerns were “already remedied” by consent decrees the publishers agreed to as part of their settlements.

The company also objects to the government’s attempt to regulate its sale and use of electronic applications on devices such as the iPad. The plan includes a requirement that Apple allow competitors such as Amazon to provide links from their e-book applications to their own electronic bookstores.

Such a move would “entrench Amazon’s dominant position” as a seller of e-books, Apple said in the court filing.

In its proposal for the appointment of an external compliance monitor, the Justice Department said Apple should pay the salary and expenses. The person would work with an internal antitrust compliance officer who would be hired by and report to the outside directors on Apple’s audit committee, according to the plan.

The government’s proposal extends to media other than electronic books. It would prohibit Apple from entering agreements with suppliers of music, movies, television shows and other content if those deals are likely to increase the prices at which their competitors sell them.

The case is U.S. v. Apple Inc., 12-cv-02826, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net

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