On the surface, it would appear that Apple Inc. (NASDAQ: AAPL) has little to fear from the antitrust lawsuit filed by the U.S. Department of Justice last week.
The DOJ accused Apple of colluding with several major publishers to fix the prices of electronic books in its iBookstore.
The evidence was strong enough that three of the five book publishers settled before the DOJ filed the suit. Two, Macmillan and the Pearson PLC (NYSE ADR: PSO) Penguin Group, decided to fight the charges along with Apple.
The antitrust case itself poses little threat to Apple. With $100 billion in the bank, it can afford to fight government lawyers until doomsday.
Even losing the case wouldn't make much of a dent in Apple's pocketbook. The three publishers that settled paid a combined $51 million, hardly a concern to a company that earns an average of $120 million every day in profits.
Likewise, a remedy that forces Apple to lower prices for e-books in its iBookstore would have almost no impact on earnings. Nearly all of Apple's profits come from sales of high-margin hardware like the iPhone and iPad. Profits from all iTunes Store segments, which include the far more voluminous sales of apps and music, account for less than 4% of Apple's profits.
"This echoes back to the peak in Microsoft," Sean Udall, author of Minyanville's TechStrat Report, said in a Yahoo! Finance interview. "Microsoft had a monopoly and was doing great and was the star tech stock of yesteryear. And you can almost draw the peak of their stock when they had major DOJ issues."
The problem with being in the DOJ's gunsight is that it distracts management, makes the company hesitant to innovate, and blemishes the company's public image.
While antitrust woes may not have been entirely responsible for Microsoft and IBM ceding their dominant positions in tech, they were clearly a major factor.
And worse for Apple, the e-book case could be just the beginning.
"The case that would worry me tremendously would be if the government or DOJ sued Apple over massive control of the music industry via iTunes," said Udall, who believes the e-book lawsuit could be the government's way of "testing the waters" for other cases against Apple.
Indeed, Apple has a 65%-72% of the digital music market. And it retains total control over the software for the iPhone and iPad; apps can only be purchased from Apple's App Store. Those are exactly the sort of things that attract the DOJ's attention.
Microsoft's Antitrust Troubles
Through most of the 1990s, Microsoft could do no wrong. Not only was its stock skyrocketing, but the public loved the company.
But in 1998 the DOJ filed suit against the company, charging that it was abusing its monopoly power in desktop operating systems – Windows ran on some 95% of the world's PCs – to block out competing programs, such as the Netscape browser.
Microsoft lost the case in 2002, and was subject to DOJ monitoring of its behavior for another eight years after that. It fundamentally changed the company.
At a Harvard Business Schools Cyberposium in 2005, Mark Kroese, a general manager of information services and merchant platform product marketing for the Microsoft Network (MSN), described the case's impact.
"Working at Microsoft today vs. five years ago is different," Kroese said. "If anyone thinks the antitrust case hasn't slowed us down, you're wrong. If I want to meet with a products manager for Windows, there needs to be three lawyers in the room. We have to be so careful, we err on the side of caution. We are on such a fine line of conduct."
Apart from the internal disruption, Microsoft's public image suffered a severe blow. Painted as a bully in the DOJ suit — and consequently in most of the media coverage of the case — the company's reputation never recovered.
That opened the door for companies like Google Inc. (NASDAQ: GOOG) and Apple to replace Microsoft in the public's mind as a chief innovator of the tech age.
IBM's Antitrust Troubles
In an earlier age, IBM dominated the world of tech for decades. Big Blue's DOJ problems began percolating as far back as 1950s when the government went after the company for monopolizing the "tabulating machines" business.
IBM settled that case, but the government filed another, similar suit in 1969. This was far more serious, as the DOJ was seeking to break up IBM. The case dragged on until 1982, creating a long headache for IBM that helped knock it from its perch atop the tech world.
For one thing, it forced the company to run a decades-long ad campaign to fight the negative image of IBM as monopolistic.
But the bigger problem for IBM was the internal disruption the case caused. IBM ended up producing at least 94 million documents for the government. CEO Frank Cary was required to produce 300,000 pages of documents from his files and was questioned at depositions for 53 days.
IBM eventually won the case, partly because conditions in the tech world had completely changed over the 13 years it lasted, but the damage to IBM was lasting.
"Twelve years of litigation were an enormous distraction in a time of rapid technological and business change," writes technology analyst Steve Wildstrom in an article on Tech.pinions. "IBM management became cautious and over-lawyered, constantly looking over its shoulder-a condition that persisted for years after the case ended. The antitrust case was almost certainly a major cause of the serious decline of IBM in the late 1980s and early 90s."
Whatever the merits of the DOJ's e-book antitrust case, fighting it rather than settling is probably the most dangerous course Apple could take. Apart from a drawn-out fight with the government over something as trivial to its business as e-books, Apple risks the DOJ zeroing in on something far more vital, such as its App Store or dominance of the tablet market with the iPad.
Apple's size, influence, and most of all its vertically integrated business model are all red flags to the DOJ.
"Even if Apple beats back [this] investigation, broader questions are being raisedabout the company's power that could invite a much broader investigation," says Adam Thierer of Forbes. "The danger for Apple is that antitrust becomes an omnipresent threat that must be factored into all ongoing business decisions. As earlier tech titans likeIBMand Microsoft learned, when antitrust hangs like the Sword of Damocles, every decision about how to evolve and innovate becomes a calculated gamble."
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