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Apple Exec Points Finger at Publishers in E-Book Trial

Apple Exec Points Finger at Publishers in E-Book Trial

Did Apple twist publishers' arms in a maneuver to eradicate half of Amazon's e-book market share? Or did publishers take advantage of Apple to ditch the wholesale e-book model and pad their profits? The end of this page-turner has yet to be written, but the story is reaching a climax as Apple defends itself against the Justice Department's e-book price-fixing allegations.

Apple's Eddy Cue, senior vice president for Internet software and services, gave testimony on Thursday in the e-book price-fixing trial under way in the New York U.S. District Court.

Cue, who was Apple's primary negotiator with most of the publishers during the run-up to the launch of iBookstore in 2010, told the court that it was not surprising that publishers began increasing pricing for e-books, especially new and best-selling titles, after Apple entered the market.

However, Apple did not aggressively or deliberately push for industry prices to rise, he maintained. Rather, prices started rising from the then-ubiquitous US$9.99 per e-book due to a series of events that are typical in any competitive market.

Remember When E-Books Cost $9.99?

To understand Cue's perspective, one must think back to 2009, when Apple entered the e-book market. Amazon then dominated the space, thanks to the Kindle e-book reader it introduced in 2007. Amazon was controlling pricing through the wholesale model it established with publishers -- a model they disliked.

However, consumers loved the lower price point and thought it was fair: E-books eliminated a significant portion of costs associated with traditional book publishing, after all, particularly those associated with printing and distribution.

Enter Apple, which initially thought it would adopt the wholesale model as well, according to Cue. After Cue spoke with publishers, however, Apple decided to go with an agency approach. Under the agency model Apple would receive a 30 percent commission on the sales and the publishers would set the price.

Soon after, Amazon moved to the agency model as well and promptly lost a good portion of its market share -- close to half -- when its e-book prices began to increase by $2.00 or more.

Consumers got dinged "hundreds of millions" of dollars as a result, Department of Justice attorney Lawrence Buterman said in his opening statements at the trial earlier this month.

An Indirect Nudge

The government alleges that Apple orchestrated this market shift indirectly by inserting a clause in its contract that allowed it to drop pricing if other e-tailers were selling the same books cheaper. Apple maintains the clause was necessary for competitive reasons.

This issue -- which will be resolved by this trial -- has been debated in various forms and venues since the government came forward with its charges more than a year ago. Besides suing Apple, it sued the five largest U.S. publishing houses, alleging that they colluded to increase e-book prices.

All of the major publishers -- Penguin Group, HarperCollins Simon & Schuster, Hachette Book Group and Macmillan -- settled over the course of the year. Apple is the lone holdout.

High Stakes

The stakes are high for Apple in this case. While the government is not seeking damages, it is expected to seek an order barring Apple from its current market approach. Depending on the outcome, Apple may also find itself facing civil suits from state attorneys general.

So far, it has staunchly defended the position it has maintained all along -- namely, that it was the publishers and not Apple that sought to raise prices to loosen Amazon's grip on the market and, more importantly, crash its wholesale price model.

Apple also is clinging to the notion -- at least in court -- that consumers weren't harmed by the rise in prices.

"We gave consumers great prices and a great selection of books that weren't available elsewhere, in a better bookstore. We gave them a great offer," Cue said during his testimony, according to published reports.

Apple is bringing top-notch legal firepower to this fight, which is a factor in its favor. Also much of its argument does resonate: It makes sense that book publishers would seek to raise e-book prices -- and wouldn't need the guiding hand of Apple to do so -- if they were unhappy with their margins under the old model.

Still, all bets are off.

"It is difficult to speculate on how any case -- especially in antitrust, especially one of this size -- will unfold," Peter Toren, partner with Weisbrod Matteis & Copley, told the E-Commerce Times.

Antitrust issues are so complex that sometimes seemingly obvious conclusions -- i.e., that the publishers wanted to make more money, so they all automatically raised their prices -- are not necessarily so straightforward under the law, he pointed out.

It could well be that Apple is facing an uphill climb with this case, Keith N. Hylton, a law professor at Boston University, told MacNewsWorld.

Before the start of the trial, the judge was trying to get Apple to settle, and she made a comment that suggested she thought the evidence would show Apple engaged in a conspiracy, Hylton recalled. "At the very least, she is not predisposed to find Apple innocent."

Of course, for Apple to win, it has to show that it didn't engage in a conspiracy.

"Given the ambiguity of the testimony to date," said Hylton, "I would have to conclude that the judge hasn't changed her opinion."


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