Disruptions: Apple’s Next Unveiling Could Make or Break a Business

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Judge Considers Limits on Apple’s Future E-Book Deals

In a sometimes testy hearing in United States District Court in Lower Manhattan, Judge Denise L. Cote said that she was considering a plan in which Apple would negotiate contracts with publishers in a staggered fashion — possibly six to eight months apart — to prevent them from engaging in another price-fixing conspiracy.

Judge Cote ruled in July that Apple colluded with publishers to raise the price of e-books before the introduction of its iPad in 2010. Those charges were brought against Apple and five major publishers by the Justice Department in 2012. The publishers all settled, but Apple held out and went to trial.

The judge’s proposal was a scaled-back version of the guidelines put forth by the government last week, when it suggested that Apple be forced to end its agreements with the five settling publishers and avoid entering similar agreements with producers of movies, TV and music. Apple responded by calling the proposal a “draconian and punitive intrusion” into its business.

The publishers who settled also objected to the Justice Department’s proposed remedy, saying that it would fundamentally change their existing settlements.

In court on Friday, Judge Cote said that she wanted an injunction to be tailored so that it would encourage innovation in a rapidly changing e-book business and yet prevent collusion on price in the future.

“I have no desire to regulate the App Store,” she said.

But Judge Cote also slammed the publishers for lacking “contrition” and said that she feared future collusion in the e-book market. Although the publishers eventually agreed to settlements, none of them admitted wrongdoing.

Judge Cote said that the publishers had played “a rough and tumble game” and engaged in “blatant price fixing.”

“None of the publisher defendants have expressed any remorse,” she said. “They are, in a word, unrepentant.”

Lawyers for Apple and the government said in court that they would meet in the next week and discuss the judge’s proposal. Another hearing is expected later this month.

Apple and the Justice Department declined to comment.

Hachette Book Group, HarperCollins and Simon & Schuster settled in April 2012; Penguin Group USA and Macmillan settled later. Penguin has since merged with Random House, which was not named in the lawsuit.

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Bits Blog: Apple’s Peter Oppenheimer Is Highest Paid Finance Chief

Apple Peter Oppenheimer, Apple’s chief financial officer.

Being a tax ninja pays off at Apple. Its chief financial officer, Peter Oppenheimer, who has helped the company sidestep billions of dollars in taxes, was the highest paid chief financial officer of 2012, according to data compiled by Bloomberg News.

Mr. Oppenheimer was awarded a $68.6 million package, much higher than the $4.17 million that went to Tim Cook, Apple’s chief executive, says Bloomberg. Oracle’s financial chief, Safra Catz, was the second highest paid with $51.7 million; Google’s Patrick Pichette was third with $38.7 million.

Of course, all corporations do their best to minimize taxes. Apple’s Mr. Oppenheimer has done an exceptional job managing the company’s cash, finding legal ways to side step billions of dollars in taxes, allocating about 70 percent of its profits overseas, where tax rates are often much lower.

Last month, Apple’s Mr. Oppenheimer raised a bond deal of $17 billion to fund a $100 billion payout to shareholders. By borrowing money, or issuing debt, Apple avoided $9.2 billion in United States taxes.

Apple’s Rivals See an Edge in Using Wireless Accessories

Hotels outfitted guest rooms with alarm clocks containing a telltale wedge of 30 tiny pins that could play music from Apple’s devices and charge their batteries. Retail stores were thick with sound docks and other speaker systems meant to work with Apple gadgets.

But Apple’s iron grip on the digital accessories in hotel rooms, store shelves and living rooms is starting to slip — potentially risking the royalties it earns from accessory makers and, more significant, giving Apple customers more freedom to switch to rival products. That could be an issue for a company whose stock has been shaken in recent months as investors worry that the iPhone business is slowing.

Jeremy Horwitz, editor in chief of iLounge, a Web site devoted to Apple accessories, said Apple’s aggressive control over accessories for its products drove many makers to more open means of connecting devices, which helped feed the success of mobile devices made by other companies.

“At some point Apple’s obsession with having control over everything that is associated with its products may wind up biting it,” Mr. Horwitz said.

The Bluetooth standard for wireless connections has allowed accessory makers to build products that can work with many kinds of devices because they no longer have to worry about a physical hook. Other phone makers like Samsung and tablet-computing device makers like Amazon have become strong alternatives in the eyes of gadget shoppers.

And Apple itself provided an opening for competitors when it changed the way its phones connect to other devices, aggravating both its business partners and consumers.

Now accessory makers are eager, even obliged, to think beyond Apple.

“We’ve had to adapt to new technology, support more devices and meet the growing demands of consumers looking for accessories that can accommodate multiple devices,” said Ezra S. Ashkenazi, chief executive of iHome, one of the biggest makers of iPhone clock radios and other Apple audio accessories. This year, iHome is releasing more products with Bluetooth than ever before, he said.

Apple says it is fine with the wireless direction in which accessories are headed. “Apple provides users with the best wired and wireless connectivity options to work with the broadest range of accessories,” said Tom Neumayr, a spokesman for Apple. “As a result, iOS users have access to the world’s largest ecosystem of options and the most seamless integration with our products.”

Apple expected some grumbling from customers and partners last fall when it introduced in the iPhone 5 a new way for the mobile phone to connect to other devices. But its executives defended the connector, Lightning, because the new, smaller design allowed for slimmer phones and tablets.

While the 30-pin connector can be plugged into an old iPhone in only one way, a Lightning cable works even if it is flipped over.

Apple did not tell accessory makers about the change ahead of time, which is normal for a company known for its secrecy, but it was painful for many of its partners.

“You really don’t know where Apple is going to go next, if they’re going to change to something else down the road,” said Kyle Thompson, director of marketing for Cambridge SoundWorks. “They’ve made a lot of companies like us really nervous.”

That change frustrated partners whose customers had invested in products that used Apple’s old 30-pin connector. Those older devices are incompatible with the latest Apple products without an adapter that Apple sells for $29 to connect to the latest Apple products. Also, the new Lightning connectors are more expensive to license and manufacture than the old ones, electronics makers say.

“A lot of us were bitten pretty badly by the connector transition,” said Ian Geise, senior vice president for marketing and product development at Voxx Accessories Corporation, which makes audio products under RCA, Acoustic Research and other brand names.

Bits Blog: In Shake-Up, Apple's Mobile Software and Retail Chiefs to Depart

Jeff Chiu/Associated Press Scott Forstall at an Apple event in September.

Scott Forstall, who has run software development for Apple’s iPad and iPhone products, and John Browett, the head of the company’s retail operations, are leaving Apple, in a rare management shake-up at the company.

The departure of Mr. Forstall, an Apple veteran, will shift his responsibilities to several other Apple executives. Most notably, Eddy Cue, the head of Apple’s Internet services, will take over development of Siri and maps, two efforts Mr. Forstall oversaw that have been widely criticized for their reliability and accuracy.

Apple said in a news release that the management changes would “encourage even more collaboration” at the company. Mr. Forstall will leave Apple next year and serve as an adviser to Tim Cook, the chief executive, in the meantime.

Dixons Retails, via Associated Press John Browlett

Jony Ive, the head of Apple’s industrial design, will take on more software responsibilities by providing more “leadership and direction for Human Interface,” Apple said. Craig Federighi, who was previously in charge of Apple’s Mac software development, will also lead development of iOS, the software for iPads and iPhones.

The departure of Mr. Browett, who joined Apple only in April to lead its retail operations, followed a number of missteps by him. In August, Apple took the unusual step of apologizing for a plan to cut back on staffing at its stores. Apple said that a search for a new head of retail was under way and that the retail team would report directly to Mr. Cook.

Common Sense: Apple’s Map App Could Raise Antitrust Concerns

These milestones were reached with the steady hand of Timothy D. Cook at Apple’s helm, but they seem inseparable from Mr. Jobs. They are the result of initiatives begun during his tenure and, in many ways, reflect his personality — one that was perfectionist, competitive, driven and controlling.

Those qualities have remained on display at Apple in the year since his death, most recently in the decision to substitute Apple mapping software for rival Google’s in the iPhone 5 and the new iOS 6 operating system, as well as allegations that Apple and book producers conspired to control the price of e-books.

Apple hasn’t fully explained its decision to replace Google’s maps, but it probably reflects the evolution of the Apple-Google relationship from close allies to fierce competitors, a process that began well before Mr. Jobs’s death. Apple also hasn’t indicated whether it was carrying out Mr. Jobs’s wishes, but the decision seems consistent with his “compulsion for Apple to have end-to-end control of every product that it made,” as Walter Isaacson put it in his book “Steve Jobs.”

Apple’s use of its own mapping technology in the iPhone appears to be a textbook case of what’s known as a tying arrangement, sometimes referred to as “bundling.” In a tying arrangement, the purchase of one good or service (in this case the iPhone) is conditioned on the purchase or use of a second (Apple maps).

To the degree that tying arrangements extend the control of a dominant producer, they may violate antitrust laws. Probably the best-known example was Microsoft’s attempt to bundle its Internet Explorer browser on Windows software, to the disadvantage of Netscape, a rival browser, despite complaints that Explorer was initially an inferior product. This was the linchpin of the government’s 1998 antitrust case against Microsoft. E-mails were introduced as evidence in which Microsoft executives indiscreetly stated their intentions to “smother,” “extinguish” and “cut off Netscape’s air supply” by bundling Explorer with Windows.

Among other findings, the judge ruled that Microsoft had engaged in an illegal tying arrangement. The outcome of the case kept the door open to competition in the browser market. Today, the once-dominant Internet Explorer faces stiff competition from rivals like Mozilla Firefox and Google Chrome. Microsoft’s settlement came too late for Netscape’s browser, which was no longer being developed or supported after 2007. But Firefox traces its lineage to Netscape’s source code.

Could Apple’s map suffer a similar fate?

Early users searched for locations and got nonsensical results. Mad magazine ran a parody of the famous Saul Steinberg New Yorker cover of the world seen from Ninth Avenue “now using Apple Maps,” in which the Hudson was the Sea of Galilee and other landmarks were ludicrously misidentified.

Mr. Cook swiftly tried to contain the damage. “Everything we do at Apple is aimed at making our products the best in the world. We know that you expect that from us, and we will keep working nonstop until Maps lives up to the same incredibly high standard,” he said a week ago.

Would Mr. Jobs have been so quick to apologize? Perhaps not. He was famously resistant to the idea after complaints about the iPhone 4’s antenna, and the Apple “genius” manual instructs employees never to apologize for the quality of Apple technology.

Bundling its maps with the iPhone 5 may yet prove to be a strategic blunder for Apple, but it may nonetheless skirt the boundaries of the antitrust laws that tripped up Microsoft. “There’s no antitrust theory under which vertically integrating into an inferior component is considered anticompetitive,” Herbert Hovenkamp, an antitrust professor at the University of Iowa College of Law, told me. That’s because the problem is considered self-correcting by market forces. “There have been lots of complaints about tying arrangements involving inferior products. But ordinarily, incorporating an inferior product doesn’t increase your market share, because consumers leave for a better product. It’s not a promising strategy,” Professor Hovenkamp said. The danger for Apple is that customers will choose an Android phone with a superior Google Maps application rather than an iPhone.

An exception is when a monopolist does it, which is what happened with Microsoft. If a consumer used Microsoft Windows, the dominant software, Explorer was installed by default. “This arose with Microsoft because back then Explorer was considered inferior and quirky,” Professor Hovenkamp said. “But that wasn’t why it was a violation. It’s because consumers had no choice.” By contrast, Apple’s iOS isn’t the dominant smartphone operating system. Apple’s software has captured 17 percent of the global smartphone market, compared with 68 percent for Google’s Android. Apple users who want Google maps can readily switch to an Android phone. “Most tying arrangement cases have involved firms with close to 100 percent market shares,” Professor Hovenkamp noted.

The real test will be whether Apple makes rival mapping apps readily available for downloading on its iPhones. In his apology, Mr. Cook suggested that iPhone users try alternatives, and even suggested using Google maps by going to Google’s Web site. Google said it was working on a map application for the iPhone.

From an antitrust perspective, the e-books controversy is more serious. United States antitrust authorities have accused Apple of conspiring with major book publishers to raise e-book prices, and Apple offered to settle a European investigation into the same practices. The Justice Department cited a passage in Mr. Isaacson’s book in which Mr. Jobs called the strategy an “aikido move,” referring to the Japanese martial art, and said, “We’ll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.”

The charges describe a classic price-fixing arrangement, “which is presumptively illegal,” Professor Hovenkamp said. “Everybody wants market dominance, not just Apple. But it’s how you go about it. You can’t go out and fix prices.” Apple has denied the charges, and a trial has been set for next year.

Mr. Cook’s challenge has always been to guide Apple out of the shadow of its visionary and charismatic founder. Can he encourage Mr. Jobs’s competitive zeal and drive for perfection while distancing Apple from Mr. Jobs’s potentially damaging — even unlawful — need to dominate and control? “Historically, Apple hasn’t been very sensitive to antitrust issues,” Professor Hovenkamp said.

There’s no quarreling with Apple’s extraordinary success, and Mr. Jobs’s obsession with controlling all aspects of Apple’s products clearly paid off for its customers and shareholders. It proved to be the right strategy for the time. But competition in smartphones and Apple’s other efforts has intensified in the year since Mr. Jobs died, and Apple may not be able to continue blindly down that path. With his swift apology for the imperfections of Apple’s maps, Mr. Cook seems to have taken a step in the right direction. If he also settles the e-books case and makes Google’s and other map applications readily available to iPhone users, he’d be signaling a clear break from the past and encouraging Apple to embrace, rather than stifle, competition.

This article has been revised to reflect the following correction:

Correction: October 5, 2012

An earlier version of this column referred incorrectly to a case in which Microsoft resolved anticompetitive concerns by agreeing to offer users a choice of browser. The agreement was part of a 2009 settlement of a European antitrust case, not the United States government's 1998 antitrust case.

Bits Blog: Tim Cook Apologizes for Apple's Maps

After more than a week of complaints and jokes about Apple’s new maps software, the chief executive of the company apologized on Friday to customers for the frustration it has caused.

In a letter to customers posted on Apple’s Web site, Mr. Cook said he was “extremely sorry” for the anguish caused when the company replaced Google’s maps with its own, acknowledging that the company’s new Maps app did not live up to its standards.

He said that 100 million people were already using the maps, and the more who use it, the better the software will get. In the meantime, while Apple fixes its maps, he suggested customers can try alternatives available for download in the App Store or on the Web — including Google’s.

The full letter follows:

To our customers,

At Apple, we strive to make world-class products that deliver the best experience possible to our customers. With the launch of our new Maps last week, we fell short on this commitment. We are extremely sorry for the frustration this has caused our customers and we are doing everything we can to make Maps better.

We launched Maps initially with the first version of iOS. As time progressed, we wanted to provide our customers with even better Maps including features such as turn-by-turn directions, voice integration, Flyover and vector-based maps. In order to do this, we had to create a new version of Maps from the ground up.

There are already more than 100 million iOS devices using the new Apple Maps, with more and more joining us every day. In just over a week, iOS users with the new Maps have already searched for nearly half a billion locations. The more our customers use our Maps the better it will get and we greatly appreciate all of the feedback we have received from you.

While we’re improving Maps, you can try alternatives by downloading map apps from the App Store like Bing, MapQuest and Waze, or use Google or Nokia maps by going to their websites and creating an icon on your home screen to their web app.

Everything we do at Apple is aimed at making our products the best in the world. We know that you expect that from us, and we will keep working non-stop until Maps lives up to the same incredibly high standard.
Tim Cook
Apple’s CEO

Bits Blog: Japanese Look for Alternatives to Apple's Maps

Kimimasa Mayama/European Pressphoto Agency Tokyo’s maze of buildings.

In the wake of the problems Apple’s new iPhone apps are causing Japanese, smartphone users are flocking to another map app, from Navitime. The Tokyo start-up scoffs at Google Maps when it comes to mapping journeys through the streets of Tokyo that confuse even native Tokyoites.

Google had done a better job than Apple in mapping Japan, incorporating various data sources and putting its software engineers to work to tailor its map app to meet local needs and tastes. But with Google’s maps no longer easily accessible from the newest iPhones, the past few days have given Japanese map companies a chance to show their stuff.

Navitime, a pioneer in online map navigation here, claims to provide a “total navigation” service on every available transportation medium, and the service largely lives up to its name.

On the Navitime app, a search for train directions between two locations in Tokyo not only brings up timetables and routes on foot; the app also suggests which train cars to board to avoid crowds and get to the correct exits quickly.

A crowdsourced function, meanwhile, gives a real-time analysis of congestion on Tokyo’s notoriously crowded subway lines, from Level 1 (seats available) to Level 5 (packed in, can’t move) to the dreaded Level 6 (impossible to board the train at all).

And for those who give up on Tokyo’s trains, Navitime provides maps tailored for cyclists, who can select routes that have fewer uphill routes or go mainly along big roads, for cyclists who like to go fast. Or users can opt for routes that stick to narrower backstreets for a quieter ride.

“It’s the attention to on-the-ground detail that counts,” said Keisuke Onishi, Navitime’s chief executive, who founded the mapping service in 1997 after studying mapping algorithms in college in the 1980s.

Mr. Onishi now leads a 400-person company that sends out teams to physically check and update routes and estimated times.

“You just can’t work off existing data. You have to go out and get live information,” Mr. Onishi said, “or people are going to get lost.”