Apple called 'facilitator' of ebook pricing shift

Apple was accused of being a "facilitator" and "go-between" of a publishing industry shift that led to higher e-book prices, in testimony on Tuesday in a US antitrust trial against the firm. David Shanks, chief executive of Penguin USA, confirmed his characterization of Apple during the first full day of testimony in the three-week trial. The government says Apple was a ringleader of the major publishing houses in a conspiracy to lift the price of best-selling e-books from the $9.99 charged by Amazon, which dominated the sector before Apple's entry in early 2010. The case centers on an intense month and a half of negotiations between Apple and the six largest US publishers ahead of Apple's January 2010 launch of its iPad and the announcement of its e-bookstore. Prior to then, the publishers sold books to Amazon and other online booksellers through a "retail" model in which the retailer set the price. After Apple's entry, the industry shifted to an "agency" model, where the publisher sets the price and the online bookseller receives a 30 percent commission. The government contends that this shift, orchestrated by Apple and imposed on Amazon and other booksellers, ended the days of Amazon's $9.99 online bestsellers and cost consumers hundreds of millions of dollars. Apple has argued that its interests were in conflict with those of the publishers and that the negotiations were contentious. Apple insists its updates to the publishers on the overall status of the negotiations were not evidence of collusion, but a pressure tactic to get other publishers to join. Shanks said publishers were afraid Amazon's low pricing was "cannibalizing" the sector's profit structure, which rests on selling paperback bestsellers about a year after the hardcover version to appeal to cost-conscious customers. By selling the books for $9.99 right after publication, Amazon threatened "the fairly delicate ecosystem" in publishing, Shanks said. He recalled that he was "very excited" at news of Apple's interest in bookselling because of the opportunity to reach tens of millions of additional customers. In an email presented by the government, he also effused that the Apple deal would allow Penguin to "take control" of the e-book price. During cross-examination with Apple, Shanks said he never heard Apple refer to itself as a "facilitator" or a "go-between." Shanks also said he did not characterize Apple in this manner during the talks with the technology giant. The government presented an email sent from Shanks to Apple's chief negotiator in which the Penguin executive reported reaching a groundbreaking agreement with Amazon to shift to the same pricing system Apple implemented. The email, sent at 3:00 am, disclosed non-public information to Apple about an Apple competitor, said Mark Ryan, an attorney for the government. "Great news and congratulations!!!," Apple executive Eddy Cue wrote back to Shanks. Shanks said the private email was a heads-up given the Penguin-Apple deal, in which Apple had the right to match the price of any book that Amazon or another competitor offered. The Amazon-Penguin deal would have allowed Apple to raise prices. During cross-examination, Shanks described Apple as a tough negotiator with a "take or leave it" approach to entering the book business. "I did not get the deal that I wanted, but I wanted to be sold to the Apple customers," Shanks said. In earlier testimony with Apple associate counsel Kevin Saul, the government presented a letter from Apple to the publishers that included a provision for the publishers to move to the agency model with other booksellers. Saul testified that this provision was quickly discarded because it did not meet Apple's business objectives. The government also presented a written exchange between Saul and a negotiator from Wiley books in which Saul suggested Wiley could shift to the agency model with other retailers. "I was negotiating a term," Saul said. "It was absolutely not a condition."