On the third day of the e-book trial
brought by the Department of Justice against Apple, the judge heard from an Amazon executive who claimed that Apple's proposal of a shift to the "agency model" of e-book pricing (where publishers set the price rather than retailers) was intended to hurt sales
of Amazon's Kindle e-reader and its success as a seller of e-books. Judge Denice Cote, who is conducting the bench trial, also heard from Apple lawyers that the length of negotiations and differences in the contracts it had with publishers prove that it did not collude to set prices.
The DOJ called Amazon Vice President of Kindle Content Russell Grandinetti to the stand, who said that following agreements publishers forged with Apple in 2010, the publishers came to Amazon with an "ultimatum" to change the business arrangement. The publishers, he said, told Amazon that it would either move to the "agency pricing" model as Apple and others had done, or that publishers would withhold new releases in e-book versions for a period of time, a practice known as "windowing" where the printed versions would be exclusive for a period of time -- about seven months, according to Grandinetti -- before the e-book version became available at a lower price.
This may be the same meeting that had been previously described by Penguin CEO David Shanks as being "a very unpleasant meeting" with lots of "yelling, screaming and threatening" by Amazon, which already had a documented history of punishing publishers that didn't adhere to its rules (Grandinetti admitted that he "expressed how unpalatable the choice presented was" in court). Shanks told the judge that all six (at the time) major publishers were "unhappy" with the online giant's routine loss-leader pricing on new releases, sometimes as low as one-third the price of the printed version of the same book.
The publishers felt that Amazon's tactic -- designed to build the market for e-books and in particular its own Kindle reader -- was devaluing the format and harming sales at brick-and-mortar bookstores which were (and still are to a lesser extent) the publishers' bread and butter. At the time, Amazon already had around 90 percent of the e-book market. Grandinetti said that in response to the "ultimatum," he told publishers that Amazon may have to "modify business relationships" were it forced to adopt the agency model.
Publishers had originally responded to Amazon's loss-leader pricing of e-books by raising the wholesale price, but found that Amazon would simply accept a bigger loss on each book sold, being able to absorb the losses across its other businesses. Grandinetti told the court that he believed the publishers colluded to force the agency model on Amazon in an effort to slow down the success of the Kindle.
He admitted that Amazon made attempts to fight the switch away from wholesale, including threatening to end relationships with other publishers -- a point reiterated by Simon & Schuster CEO Carolyn Reidy, who said Grandinetti himself threatened the publisher
after they announced they wanted to change to agency model pricing.
After various threats and short-term suspensions failed to bring the publishers to heel, Amazon capitulated and signed a three-year agreement with the publishers to use the agency model. Amazon has continued to be the dominant force in the e-book market, but now has viable competition (from Apple and Barnes & Noble among others) with all players selling e-books for roughly the same price. Grandinetti will continue his testimony on Thursday.
The DOJ's case against Apple largely hinges around the "most favored nation" clause in Apple's agreements with the publishers, which stipulated that publishers could not sell e-books to other retailers for less than what they sold them to Apple. Since Apple had proposed the "agency model," a staple of the print book business for decades, as a model that would keep the e-book business sustainable while giving more control to the publishers as to how to price e-books, the set price from publishers required that Amazon raise its prices in order to maintain agreements with the publishers -- a point the DOJ says cost consumers "hundreds of millions of dollars" in higher e-book prices.
In fact, e-book prices have declined since Apple entered the market and since the "agency model" became the standard across all the digital book storefronts, however new release prices did stagger upwards for a period following Apple's arrival in the market. The move enabled other companies, such as Sony and Barnes & Noble, to compete on more equal footing -- as they were unable to front significant losses on e-books as Amazon was. Reidy supported Shanks' earlier testimony that Amazon had furiously resisted any change from the "wholesale" model that allowed it to set pricing rather than publishers, and that publishers were unhappy both with Amazon's policy of predatory pricing as well as its history of retaliation and bullying of publishers who didn't cooperate.
The DOJ's case was further undermined somewhat by Apple attorney Orin Snyder's repeated pointing out that the MFN clauses in the publisher's contracts varied significantly from publisher to publisher. While the DOJ complained that Apple's MFN clause -- which in and of itself is not illegal -- was designed to "protect Apple from having to compete on price at all while still maintaing [the company's] 30 percent margin," and thus conspired to hike e-book prices, Snyder noted that Apple spent long weeks negotiating five different MFN clauses for each of the five major publishers. Had it actually been a collusion, Snyder said, the terms would have had to have been similar if not identical.
In fact, Penguin CEO David Shanks had testified on Tuesday that Penguin "strongly resisted" the MFN model due to fears that Apple would simply match Amazon's loss-leader pricing (being wealthy from its other businesses like Amazon), plus take its 30 percent commission. Simon & Schuster wanted allowances for book clubs and one-off, limited-time promotions. Each MFN agreement contained different exceptions not present in the other agreements, and Apple Associate General Counsel David Saul on Tuesday described the negotiations as "particularly difficult," sometimes spending "12 hours a day negotiating, emails, exchanging drafts," and calling the process "challenging [and] tiring."
The difference in the agreements between publishers bolster's Apple's claim that it did not conspire, and weakens the government's case, noted two legal experts who commented on the matter to AllThingsD
. They described the testimony as a "direct refutation" of one of the key assertions on which the government is building its case, but did not call it a "silver bullet" in Apple's favor. "It does make the government's case harder," said Stanford law school professor Mark Lemley, "but it doesn't mean there was no conspiracy." Berkeley Center for Law and Technology Director Pam Samuelson concurred, saying "it is quite possible for antitrust co-conspirators to mask agreements in restraint of trade by adopting differently-worded documents."
There is also some evidence presented at the trial that publishers -- long before Apple began its negotiations for what became the iBookstore -- were aware that in banding together to convince Amazon to stop undercutting e-book prices, they may be crossing the line into collusion. One publisher representative told another at a 2009 meeting that did not involve Apple (as it had not conceived the iBookstore until late 2009) that they should "double delete" emails related to a meeting about what to do about Amazon, according to the government's evidence.