Apple senior v-p Eddy Cue returned to the stand at the Apple e-book price fixing trial, facing continued government efforts to portray his talks with Big Six publishers as an evolving conspiracy marked by repeated inappropriate contact during negotiations and questioned him on the effort to get Random House to join the iBookstore. Once again, to Apple’s chagrin, the government claimed that the iBookstore was “a failure”—citing a Cue e-mail that said as much—because of high price--and focused on another Cue e-mail that singled out S&S’s Carolyn Reidy as the “leader” of the publishers actions to raise e-book prices.
The government has charged Apple with being the “ringleader” of a conspiracy to raise e-book prices, and on Monday morning, U.S. attorney Lawrence Buterman continued to press Cue on efforts the government contends was a plan hatched from the beginning to force all the Big Six publishers to move all resellers to the agency model. The government pointed to a series of five ambiguous draft e-mails from early January 2010—the notes were never sent—from Steve Jobs to Cue that show Jobs either reviewing Cue’s proposal for agency and the role of the MFN—the much disputed clause that allowed Apple to match lower e-book prices at retail competitors—or more likely, as Cue claimed, showing Jobs’ confusion over how the proposals would work financially. But in the final draft, Jobs has deleted most of the previous comments and says, “I can live with this, as long as they move Amazon to the agent model too for new releases for that first year. If they don’t I’m not sure we can be competitive …”
The government once again pointed to this e-mail and claimed this as evidence of Apple’s intent to force all publisher’s wholesale retail partners to the agency model. Cue was emphatic that Jobs simply didn’t understand, indeed Cue acknowledged that he originally did believe they should move all resellers to agency but realized it wouldn’t work, noting that “we couldn’t legally force every reseller to agency, so we abandoned that idea and switched to the MFN.” Cue was quick to point out how difficult the negotiations with publishers were—countering government claims that the fix was in—citing repeatedly that publishers such as HarperCollins Brian Murray wanted uncontrolled pricing (no price caps or price tiers) instead offering a promise, but “no commitment” to set reasonable prices. In an e-mail dated Jan. 24, 2010 to News Corp. executive Jonathan Miller (Cue had also asked Jobs to contact News Corp’s James Murdoch because Murray was so intransigent on pricing), Cue makes a plea for “reasonable prices” and says, “Brian is off his rockers,” referring to Murray’s continued efforts to get prices even higher than $14.99 cap, insisting on $20 e-books as well as proposing an agency model that also included windowing. “The deal he is proposing is beyond ridiculous,” Cue writes referring to Murray, “Our top objective is to build a store that sells books not displays them.”
Much like Apple executive Keith Moerer in earlier testimony, Cue emphasized that Apple was actually restraining publishers overly aggressive intentions to raise prices beyond what Apple could stomach. He insisted that his only interest was in making sure the iBookstore did not window—the delay of e-book editions to protect hardcover prices—and the need to have at least four publishers so the store would have a broad selection. “Windowing is a disaster for a bookstore. Customers expect content to be there after release—print or digital—we went through this with music,” Cue said.
Later Buterman dropped the big one on Cue—he offered as evidence an Apple-focused trade news blog that called the iBookstore a “failure” after six months, detailing a store without some of the biggest bestellers of the period. Indeed the government submitted an e-mail dated Oct. 2010 in which Cue says, “I agree that we have failed with the iBookstore,” blaming the “failure” on the lack of Random House titles. Though he says the store had a 20% market share (Amazon’s was 65%), the e-mail acknowledged that “we are missing the largest publisher which is a gaping hole. There is no answer in sight because Random doesn’t want to go agency and is in bed with Amazon.” Noting that the store now has about a 25% market share with Random House in it, Buterman still called it a failure, noting that its “market share hasn’t changed much. Consumers have rejected the iBookstore because its prices are too high.” Cue was cool, though certainly Apple execs don’t much care for the notion that their ventures have failed, and simply said, “No, that’s not correct.”
Pressing the Random House issue, the government also offered an e-mail from Random House COO Madeleine McIntosh to CEO Markus Dohle, that said, “unproductive (verging on unpleasant) meeting with Apple. They are now threatening not to allow any RH apps into the App Store ‘since we don’t want to work with them.’ Eddy started the meeting by accusing me of being in bed with Amazon. Lovely.” Cue said that the publisher wanted to release “a few” book apps through the App store, but he said he thought it would be “confusing to consumers,” and they wanted publishers to focus on the iBookstore. But he also acknowledged that “I wasn’t enthused to partner with a publisher who was not in our store,” Cue said.
And of course when the government wasn’t charging Apple with forcing agency terms on Amazon, they charged Apple and Cue with secretly organizing the publishers inappropriately behind the scenes. The government claimed Cue helped Macmillan’s John Sargent craft its agency deal with Amazon, citing an e-mail from Sargent to Cue dated Jan. 31, 2010: “Hi Eddy. I am gonna need to figure out our final agency terms of sale tonight. Can you call me please?” Cue dismissed the e-mail, saying that Sargent just didn’t understand the MFN and asked questions about his ability to use one-off discounts without activating the MFN. The government also cited an e-mail from Cue calling S&S CEO Reidy a “leader,” of the publishers and noting that he was “indebted,”—he denied using the word and of course the government produced an e-mail showing that he did—to Reidy as well as Sargent and Hachette’s David Young. “Because Reidy helped you get deals done?,” Buterman said, which Cue denied was the case. The government also cited another e-mail from Reidy to Cue that said, “we’re in deep negotiations with others,” referring to retailers though Cue said “she was just curious about the start of the iBookstore.”
There was much more questioning of Cue who was on the stand pretty much the entire day, being excused about 4:30 pm. The government challenged Cue on windowing, charging that while Cue claims that avoiding windowing is among Apple’s main defense claims, only 37 titles had ever been windowed up until that point. Cue agreed with the number but said, “37 titles can be huge if they’re big books.” Cue also said that Apple enforced its MFN for a year-and-a half after the iBookstore launched but stopped once they determined that “pricing differences [at other retailers] weren’t substantial.”
The day ended with Cote questioning Cue about the profitability of e-books, once again probing into the publishers move to agency despite the fact that they would receive less money per book (also meaning the writers got a smaller royalty) than under the wholesale model. She asked Cue, “did they talk about protecting physical books from e-books?” He said, “they mostly talked about the overall value of their books being devalued [because of the $9.99 price point]. But they wanted unreasonable prices for e-books when you looked at the [production] savings from print books with e-books. So I pushed back over the price tiers.”
Apple expert witness Benjamin Kleinn will continue testifying today. In addition B&N’s Theresa Horner and Apple expert witness Michelle Burtis are also scheduled to testify.