The second day of the Apple e-book price-fixing trial continued with the government’s continued focus on Apple associate general counsel Kevin Saul, citing a stream of Apple correspondence it claims urged the Big Six publishers to force all their retail partners to the agency model. But it was the testimony of Penguin Group USA CEO David Shanks, looking less than happy under government questioning, who also reluctantly acknowledged a succession of e-mails and calls that appear to show Shanks, Penguin chairman John Makinson and other Penguin executives acting in concert with his fellow Big Six CEOs to use the move to the agency model to raise e-book prices above the $9.99 price point.
Under oath, Shanks acknowledged that he had referred to Apple as “a facilitator,” of the move to agency, pretty much the same claim the government makes in its charges against Apple. In a voice that seemed to grow more quiet, gravelly and hesitant as the day wore on, Shanks also reluctantly acknowledged that throughout negotiations over the agency model, Apple kept him updated on the number of publishers planning to make the switch—Penguin clearly demanded that the iBookstore have at least three major publishers before they would join—and he informed Apple of his plan to move all Penguin resellers (who, of course, are Apple’s competitors) to the agency model before those plans were revealed publicly.
Shanks took the stand in late morning after a second day of testimony by Saul, testimony focused on the government’s claim that Apple had urged all the publishers to force all their retail partners to move to the agency model as well. The government focused its charges and questions on a series of e-mails between Apple’s then-president of Internet and Software Services Eddy Cue that suggested all the publishers should switch all their business to the agency model. Saul acknowledged the passage but claimed the e-mail was an internal correspondence and that that notion was abandoned. But U.S. Attorney Mark Ryan continued to press Saul on the issue, asking him if he had “informed the other publishers that Apple had abandoned” efforts to get the houses to move all their resellers to agency. While Saul responded that he “did not know or care whether they moved other retailers to the agency model,” he also said that “I do not recall” when asked if the publishers had been clearly informed that a plan to “require” that all the publishers switch all their retail partners to agency had been abandoned.
Speaking cautiously and methodically throughout, Saul seemed to alternate between not recalling specifics and vehemently denying that he “was involved in any discussions about other resellers of the publishers.” The government also spent most of the morning focused on Apple’s Most Favored Nation clause, a requirement in the Apple agency agreement that allowed Apple to match the lowest price being offered by its retail competitors. The government claims the MFN allowed the company to avoid competiting on price and was a key element in the alleged conspiracy to raise e-book prices. Throughout the morning the government continued to introduce documents and e-mail that it claims show Apple monitoring all the publishers during negotiations over the agency model and the MFN clause, though both Saul and Apple’s attorney Orin Snyder denied Apple had in any interest in dealings between the publishers and other reselling partners. Saul said, “there is nothing in the agreement that required publishers to change their relationship with other retailers.”
After the lunch break, Shanks took the stand and Ryan presented him a copy of an internal Penguin document, a three year strategic plan by Makinson, that said, “We’re on a collision course with Amazon and Google,” and that the publishers needed “a common strategy” to challenge Amazon and “avoid retribution.” After being cautioned by Judge Denise Cote “to answer yes or no” and not to “explain or elaborate,” Shanks acknowledged that Penguin was “concerned that publishers would be cut out,” in the new digital landscape, “and because Amazon is large and perhaps they wouldn’t sell our books," if they were challenged. He also acknowledged a phone call between S&S CEO Carolyn Reidy and Harper CEO Brian Murray in which they discussed the possibility of charging more than $9.99 for enhanced e-books—e-books with video, sound or extra content.
Once Penguin decided to move to the agency model, Shanks said, they moved all their resellers to the model. He also acknowledged the importance of the MFN (also referred to as the “price matching,” or “price parity” clause), calling it, “a major consideration in our decision.” Shanks explained that if Penguin stayed on the wholesale model for other retailers, Apple (and later B&N, which was being switched to agency as well) would have the ability to match low prices creating a financial liability for Penguin for new releases. Time and again the government also pressed Shanks on whether Amazon was discussed during negotiations with Apple—“we probably said we didn’t like the $9.99 price point,” he said—as well as Penguin’s demand that at least three major publishers sign on for the ibookstore. “If Apple didn’t have critical mass,” Shanks explained, “it wouldn’t be a workable store without a good selection of new releases and bestsellers.”
The government also focused on a series of dinners attended by CEOs of the Big Six, including Makinson, “dinners with your competitors,” Ryan said, quickly noting that Makinson attended them without notifying Shanks he would do so. Shanks said Makinson was new to New York trade book publishing and simply wanted to meet the other players. He said Makinson, “didn’t inform me at the time though I knew he was planning to do so,” but he also acknowledged that it was “strange.”
Shanks comments about Amazon were interesting as well. He acknowledged that in 2009, Amazon represented about “90%” of Penguin’s e-book business. He also described Amazon’s reaction when he informed them of their plans to switch to the agency: “they yelled and screamed—it was very unpleasant—they were very unhappy and said they would do anything to stop us.” Once the decision was made, Penguin actually withheld its new releases—Amazon still had backlist titles—from Amazon while they negotiated a new deal. Ryan said, “despite Amazon accounting or 90% of your sales you withheld new titles from them because you wanted the industry to move to the agency model, right?” Shanks acknowledged that “yes, it was one of the reasons.”
Under questioning from Apple’s lawyer, Shanks also said there were no explicit calls from Apple to raise prices or for publishers to change their realationships to other resellers. But throughout the day, the government introduced evidence showing Shanks in discussion with publishers about prices (he admitted calling S&S CEO Reidy--she's scheduled to testify today--and checking in before signing with Apple); showing Penguin executives referring to the agency model as the “anti-price war” model and executives saying that “we don’t need to compete with publishers on the price of our books.”
Shanks even acknowledged a Penguin “talking points” document that offered suggested responses to literary agents, who were concerned that the agency model would hurt royalty payments. The document encouraged Penguin executives to reassure the agents that “Penguin was fighting to protect high prices,” suggesting that agency pricing of $14.99 for an e-book, “was better than $9.99 and e-book prices may be $16.99 or $19.99 in a few years.”
As the day wore on Shanks testimony was often labored, devolving into one-word answers delivered without much enthusiasm, but there were occasional moments of humor, including one instance where evidence was projected on a screen. Ryan asked him to read from the screen but Shanks declined, looking up the document in a notebook and saying to much laughter that “publishers will always rather hold a sheet of paper.” Shanks also told the court that he was big fan of the Kindle and in 2009 Amazon actually asked him to talk to a Newsweek reporter about the device. After the interview was over, the reporter asked him about Amazon’s plans to charge $9.99 for e-books and he said, “I hope you’re kidding.” And we all know the answer to that rhetorical question.