If there was a conspiracy to push Amazon off its $9.99 e-book pricing, Apple was not part of it, testified Apple senior vice president Eddy Cue in his long-anticipated turn on the witness stand at Apple’s e-book trial. In front of a packed courtroom, Cue testified that he had no idea whether any of the six publishers with which he was negotiating at the time were communicating with each other, whether in phone calls, meetings or dinners.
“Would it have upset you if you had known?” asked U.S. attorney Lawrence Buterman.
“If they were talking about my deal, yes it would.” Cue replied, explaining that publisher communication would have hurt Apple’s ability to negotiate the best deal for itself, and for its consumers.
But, Cue added, he did not believe publishers were talking about his deal, because if they had been sharing details from their negotiations, the publishers would have staked out similar negotiating grounds—which, Cue said, they did not. Each publisher’s negotiation, Cue said, was different, and hard-fought on all points.
In his questioning of Cue, Buterman sought to portray the launch of Apple’s iBookstore as a quid pro quo: Apple would offer a way for publishers to solve their $9.99 Amazon problem, while publishers would smooth the entry for Apple’s new store by eliminating retail price competition for e-books.
In their first “exploratory” meetings in mid-December, 2009, in New York, Cue said Apple told publishers they planned to enter the e-book market on wholesale terms—but insisted that Apple would not tolerate losing money on e-book sales, or being undersold. He also confirmed that the publishers all complained about Amazon’s $9.99 price, and wanted higher prices, and that it was HarperCollins that initially proposed an agency model.
By December 18, 2009, Apple had adopted the agency idea. On January 4, Cue sent terms sheets to publishers that floated the idea that each publisher would have to move all their accounts to agency. Cue testified, however, that he soon realized his “all-agency” idea was flawed. For one, it did not level the playing for Apple because Amazon and Barnes & Noble were also physical book retailers and key accounts. Also, there was no way to enforce the all-agency idea, as Apple could not compel a third party to sign an agency deal just because its publisher contract demanded it.
In place of the all-agency idea, Apple general counsel Kevin Saul developed the “MFN” or price parity clause that ultimately would appear in Apple’s contracts. The MFN allowed Apple to lower its price to match any other retailers. Cue said after the MFN was added, Apple no longer cared whether publishers moved their other retailers—including Amazon—to an agency model, because it guaranteed the Apple would not be undersold on price.
“You didn’t care about consumers,” Buterman observed noting that Apple knew its agency deals would yield higher consumer prices—but that was OK, as long as its ability to compete on price was protected.
The government contends that just because Apple did not codify its all-agency idea in a contract that a conspiracy did not exist. Under questioning, Buterman pressed Cue to admit that the MFN in fact was designed to incentivize publishers to move to agency—after all, if publishers did not switch other accounts to agency, Apple could not only match the lowest price out there from wholesale retailers, but would only pay 70% of that lower price, keeping their 30% agency commission. In theory, publishers may have had options, but, Buterman pressed, Cue knew those options were not realistic.
Buterman also poked holes in some of Cue’s key assertions. For example, Cue maintained that he didn’t realize the flaw of his all-agency idea until after he sent out his initial term sheets in the first week of January, 2009. However, the evidence showed that Cue was aware that Kevin Saul had begun work on the MFN in mid-December.
Buterman also raised the subject of the January 20, 2010 dinner with Macmillan CEO John Sargent. The government has tried to make the case that Cue told Sargent that Macmillan had to move Amazon to agency for all its business, a point which Sargent denied in his testimony. In an e-mail immediately following that dinner, Sargent, responding to Cue, wrote of the “single large issue” remaining for Macmillan that could sink the deal. On the stand last week, however, Sargent said he couldn’t recall the “single large issue.”
Cue, however, did recall: Macmillan wanted a waiver of the MFN for one-off promotions. Buterman seemed unconvinced that such an issue would be a dealbreaker, and then cited Cue’s deposition, given in March. Asked the same question in March, about the “single large issue,” Cue said he could not recall the issue. Asked what refreshed his memory in the last few months, Cue said it came back to him after reviewing a document with Kevin Saul—but that document was not in evidence, and wasn’t pursued.
Cue also testified that he did not know until January 31, 2010, that Sargent was planning to offer new agency terms to Amazon on January 28. After Sargent presented his terms, Amazon disabled Macmillan’s buy buttons, and Cue said he learned about the incident from the press, or from an e-mail from Sargent on January 31.
Buterman, however, confronted Cue with an e-mail conversation on January 24 with Sargent, in which he told Cue he would not be able to attend the iPad launch on January 27 because he would be in Seattle. Cue asked to visit Sargent in New York on January 28, if he was back in town.
In addition, Steve Jobs told his biographer on January 28 all about Apple’s “aikido move,” and how publishers told Amazon they had to go to agency. Could Jobs have gotten his e-book information elsewhere? No, Cue, conceded, Jobs got all his e-book updates from him. Cue knew full well that Macmillan was going to push Amazon to agency, Buterman insisted, his voice rising. “Incorrect,” Cue replied, sticking to his testimony.
Apple attorney Orin Snyder then took over the afternoon. He ran over much of the same ground, and got Cue to expand on how simultaneous negotiations with major firms is standard Apple business practice. For example, Cue negotiated the opening of the iTunes store simultaneously with the five major music labels, and just last week closed a new deal for iTunes Radio, a new music service, which he negotiated simultaneously with the five largest music publishers.
In his testimony, Cue told the court how Jobs, in 2009, had personally opposed the opening of an e-bookstore. Jobs did not believe Apple’s products available at the time offered a good digital reading experience. But with the iPad on the way, Cue said he brought up the idea of an iBookstore to Jobs in November, 2009—and Jobs signed off. “That was the good part,” Cue said. The “bad part,” was that Jobs wanted to debut the iBookstore with the iPad on January 27, giving Cue just weeks to get it done.
Cue said he was determined not to fail in launching the iBookstore, in part for the ailing Jobs, his friend and boss for over two decades at Apple. “Steve was really proud of the iPad,” Cue said, adding that the iBookstore had become important to Jobs. Cue also said that Apple engineers had only just begun to work on the iBooks application and the store, when in December, 2009, Apple representatives began meeting with the major publishers, five of which would end up signing agreements just weeks later, without ever seeing an iPad, or an iBooks app in action.
Snyder will continue his questioning of Cue on Monday, when the trial resumes. Closing arguments are set for Thursday, June 20.