US government wants to oversee Apple's iTunes and App Store

On the morning of August 5 Beijing time, after winning the Apple electronic book antitrust case last month, the US Department of Justice asked a federal judge last Friday to limit Apple's influence in the publishing market and give the government supervisory power over the iTunes Store and App Store.

Punishment Measures

If this proposal is adopted by the court, it will provide more bargaining chips for content owners such as music and TV programs. Prior to this, during the transformation from traditional media to digital media, Apple has always been drastically reducing prices.

Apple is currently negotiating with video program owners about new living room devices and services. After negotiating with record companies, the company recently launched its latest streaming music service, iTunes Radio.

The US government hopes to prohibit Apple from reaching agreements with media companies that force competitors to raise the prices of e-books, music, TV programs, or movies.

Apple strongly opposed this proposal and referred to it in last Friday's court documents as "a harsh punishment for Apple's business, disproportionate to the misconduct or potential harm determined by the court."

Judge Denise Cote of the US District Court for the Southern District of New York ruled last month that Apple conspired with five major US publishers to drive up e-book prices. Although these five major publishers had previously settled this civil lawsuit with the US Department of Justice, Apple insisted on defending itself. This proposal highlights the risks that this move might bring. Apple stated that it plans to appeal.

Supplementary Proposal

The crux of this case in early summer was the various measures taken by Apple when creating iBookstore to establish its foothold in the e-book market. Although Apple still earns substantial income through products like iPads and iPhones, the iTunes store where iBookstore and App Store are located is also an important strategic business, accounting for about 10% of the company's total revenue.

The US Department of Justice plans to impose a five-year ban on new e-book distribution contracts for Apple, thereby restricting its price competition.

Other e-book sellers can still sell e-books to Apple users via e-book apps on the App Store within two years, and they can add links pointing to their own websites in the app. Apple usually takes a 30% commission on in-app purchases, but if e-books are not sold directly within the app, this fee can be avoided.

The US Department of Justice also suggests that the court establish a monitoring procedure to ensure that Apple complies with the final judgment result submitted, which will be valid for ten years.

"According to the proposal of the Department of Justice, Apple's illegal behavior will be terminated, and Apple and its executives will be prohibited from obstructing competition through conspiracy in the future," said Bill Baer, Assistant Attorney General of the US Department of Justice.

Apple's Response

However, Apple criticized the US Department of Justice for going too far in many aspects, including attempting to change the agreement model for all e-book publishers, not just the defendants in the conspiracy pricing case. Apple also stated that the proposal of the Department of Justice would alter the rules of the App Store, which should not be the focus of this case centered around iBookstore.

The company also complained that the Department of Justice wants to "regulate all content services of Apple," but there is no evidence to support its plan to restrict the development of other content businesses of the company except iBookstore.

Apple also believes that it is "entirely illegal and unreasonable" for the court-appointed monitoring process to assess Apple's business.

Apple believes that this proposal will bring advantages to its old rival Amazon in the e-book market. Allowing Amazon users to purchase books from applications on Apple devices without paying commissions is equivalent to providing "protection" for this online retailer, exacerbating the imbalance in the competitive landscape and expanding Amazon's dominant position.

Apple stated that the court should limit the scope of supplementary proposals to the publishers involved in this case. The company also believes that the court should only restrict Apple from sharing information or restrict its ability to reach special pricing agreements with the defendant publishers in this case. Apple also stated that the company can accept reasonable antitrust penalties.

Conspiracy Pricing

Prosecutors from the US Department of Justice believe that Apple took advantage of the publishers' dissatisfaction with Amazon's aggressive e-book pricing measures and entered the e-book market when launching the iPad in 2010. Apple's solution was to let publishers set their own prices, preventing Amazon from continuing to price most best-selling e-books at $9.99, forcing industry prices to rise.

In last month's ruling, Judge Cote stated that although Apple claimed to have conducted independent and tough negotiations with each publisher, the fact of price-fixing was clear and the evidence was solid.

When entering the e-book market in 2010, Apple agreed to switch to the so-called "agency model," allowing publishers to set e-book prices instead of retailers. As part of the cooperation agreement with publishers, Apple would take a 30% commission from each e-book, while publishers must ensure that the prices offered by Amazon or other competitors cannot be lower than those of Apple.

Since Apple was found to have violated the US Antitrust Law, it will also face another compensation lawsuit initiated by the Attorneys General of 33 states in the US, who plan to represent e-book consumers who paid higher prices due to this to claim refunds. Apple is also facing class-action lawsuits brought by ordinary consumers due to price-fixing conspiracies.