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Federal judge rejects Apple's requests to police itself

Apple, Inc. (AAPL) recently had the distinction of joining the ranks of convicted antitrust abusers such as Microsoft Corp. (MSFT), AT&T Inc. (T), and Intel Corp. (INTC).  The company -- which has long cast itself as cool, rebellious hipster "cred" -- looked a lot more like "PC Guy" than the stereotypical "Mac Guy" in court earlier this year.

I. Judge to Apple: Police Yourself? Get Outta Here!

Things looked bad for Apple from the start -- all of its publisher partners effectively admitted guilt and agreed to antitrust restrictions.  Apple alone denied the charges, but it struggled to defend itself against U.S. Department of Justice (DOJ) prosecutors claims that it cost customers "millions of dollars" by entering into secret deals with eBook publishers and offering to reward them for blacklisting Apple's competitor Amazon.com, Inc. (AMZN). While none of the publishers blacklisted Amazon, the threat reportedly helped the publisher to force Amazon to adopt (higher) prices similar to Apple's.

Internet software and services chief, Eddy Cue, who masterminded the e-book deals, basically admitted that his company was responsible for driving up e-book prices from the former de facto rate of $10 to $15.  Asked if Apple (or Amazon) customers complained about the higher prices, he commented, "They may or may not have, I can't recall."

Judge Cote
Federal Judge Denise Cote told Apple this week it would have to submit to external monitoring.
[Image Source: The Illustrated Courtroom]

Not surprisingly, U.S. District Judge Denise Cote of the U.S. District Court for the Southern District of New York found Apple guilty.  Now that same judge has delivered a final ruling about what Apple must do to avoid fines and other penalties of noncompliance.  Reuters and The Verge had reporters in the courtroom detailing the ruling.

Ankle tether
Apple vigorously fought the idea of having an antitrust "tether". [Image Source: Google Plus]

In a ruling this week Judge Cote rejected Apple's request to "police itself" and ordered the appointment of an external antitrust monitor -- a key measure sought by federal prosecutors.  That monitor will be tasked with enforcing Judge Cote's order that bars Apple from entering into deals with publishers that raise e-book prices for the next four years.  Apple must also sever any current deals it has that artificially inflate the price of e-books.


Apple's iBooks store will be monitored for antitrust compliance for several years.
 
Apple did score one win over federal prosecutors, though, as Judge Cote rejected the prosecution's request to force Apple to make a major change to its App Store terms of service, which ban app makers from putting advertisements/links to outside e-book marketplaces.

II. Apple Remains a Key E-Book Player, Despite Losing Tablet Lead

Apple's devices -- particularly its iPad -- remain among the world's most used portable e-book readers.  Apple's e-book store -- iBooks (not to be confused with the old Apple laptops) -- launched with the release of iOS 4.0 in June 2010 -- not long after the original iPad went on sale.

iBooks Store
Apple's iBooks market launched in 2010. [Image Source: Engadget]

Apple owned roughly three-quarters of the emerging tablet market throughout much 2010 and 2011, but its share eventually slid as Android tablets picked up in sales.  A report by Interactive Data Corp. (IDC) showed that as of Q2 2013 Apple is still the largest single tablet seller, accounting for 32.4 percent of sales, but that its sales are actually contracting, while Android tablet sales are growing explosively, cumulatively accounting for 62.6 percent of the market.

Ebook market
Apple owns about a tenth of the total ebook market, market research shows.
[Image Source: Reuters]

Reuters' analysis indicates that in 2012 Apple accounted for a minority stake of the e-book market, but a significant one, with 10 percent of total sales (~$300M USD).  Amazon remains the dominant power with 60 percent of sales in 2012.

III. Fearing Fines, Apple Meekly Settles in Europe

Apple plans to appeal the order that forces it to submit to third party monitoring.  Tom Neumayr defiantly remarked:

Apple did not conspire to fix e-book pricing.  The iBookstore gave customers more choice and injected much-needed innovation and competition into the market.

But even as Apple winds up for its appeal of the federal court ruling worse punishments may await it.  A coalition of 33 state attorney generals have filed a class action lawsuit against Apple, looking to force the company to pay customers damages for the price fixing.  Given the conviction in federal court, it seems that Apple will have a difficult time fighting this second civil suit.

Consumers will also get a refund of $0.73 USD on non-bestseller eBooks and ~$3.06 (on average) from bestseller eBooks (which saw the biggest price bump) -- if all the publishers who have agreed to settle with the DOJ submit to its proposed terms.

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Currently, three of the five publishers in the suit -- News Corp.'s  (NWS) HarperCollins; CBS Corp.'s (CBS) Simon & Schuster; and The Hatchett Group, a subsidiary of French publisher Hatchette Livre, which in turn is a child of French conglomerate Lagardère (EPA:MMB) -- have finalized their settlements with the DOJ, which they agreed to in April 2012.

Pearson plc's (LON:PSON) Penguin -- who agreed to settle in Dec. 2012 -- and MacMillan (another Pearson subsidiary) -- who agreed to settle in Feb. 2013 -- have yet to finalize their agreements with the DOJ.  Once those final two agreements are in place, customers will begin receiving emails about applying for refunds on their purchases.

Overseas in the EU, Apple meekly settled with antitrust regulators.  The European antitrust regulators perhaps put the fear of God in Apple after they nailed Microsoft Corp. (MSFTwith multiple fines totaling around $2.8B USD over Windows antitrust abuses, plus pounded Intel with a $1.45B USD fine for allegations of CPU price fixing.  The EU settlements are similar to the U.S. ones; in the EU only Penguin fought the antitrust case at first, before eventually settling.

Sources: Reuters, The Verge





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