Apple Defends Itself in Government's E-Book Antitrust Case

Apple Logo Black - H 2012

Apple Logo Black - H 2012

The U.S. government's lawsuit against Apple for engineering an alleged conspiracy to fix the price of e-books has entered its final week with the computer giant being given an opportunity to defend its deals with publishers.

The case focuses on a time when Amazon was dominating the e-book market but selling their products at a wholesale price of $9.99 to the chagrin of the publishers. Apple then allegedly acted as a "hub" to switch the industry to an "agency model" whereby the price of e-books was raised, with Apple taking a commission of sales.

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Apple has vigorously denied allegations and has resisted settling as many book publishers have in the run-up to the trial being held in a New York federal courtroom.

On Tuesday, Apple got an assist from book retailer Barnes & Noble in its defense.

Theresa Horner, the company's vice president of digital content, took the witness stand and described the painful economics of the e-book business around 2009. At the time, Barnes & Noble was introducing its Nook e-book reader, but to sell content for a product that would compete with Amazon's Kindle, the company would have to compete with Amazon's $9.99 price point. That proved a challenge as Barnes & Noble was then paying publishers around $13 for e-book rights.

The Barnes & Noble executive said she knew things had to change.

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Most importantly for Apple, Horner testified that the company's chief executive had met with the big publishers about the situation. Horner says the company was already contemplating doing a similar agency model to the one that Apple eventually enacted -- and prepared agreements that would have entitled the company to a 30 percent commission on sales. These agreements also featured some of the same "most favored nation" provisions that have caused Apple to be on trial, defending itself against antitrust charges.

Horner said that after Apple entered the market, nobody "forced" Barnes & Noble to switch, and when asked what might have happened if the company kept the wholesale model, she answered, "We would have struggled to compete on price, and we would have continued to sustain a lower profit margin on content than we reasonably felt we could sustain."

This came a day after Eddy Cue, Apple's senior vice president of internet software and services, gave his own testimony on the witness stand.

Cue was repeatedly asked about draft e-mails composed by the late Steve Jobs to him that discussed the e-book environment and emerging deals with publishers.

As Apple prepared to reach pacts with the publishers, Jobs at one point wrote, "I can live with this as long as they move Amazon to the agent model too for new releases for the first year. If they don't, I'm not sure we can be competitive."

Prosecutors demanded to know whether that meant Apple was attempting to force other retailers to switch, but Cue said that it just suggested confusion about MFNs and that the company knew it couldn't impose on other retailers. The e-mail was also downplayed because it wasn't actually sent. In earlier testimony, Cue also denied that Apple had caused e-book prices to rise and touted the company's entrance into the market as making certain e-books available earlier as opposed to the delayed releases that happened from the practice known as windowing

During opening statements in the case, Apple's attorney Orin Snyder said that there was "no evidence — zero — that Apple knew anything about interactions between publishers" and that "Apple should be applauded and not condemned for its beneficial impact on the e-book market."

DOJ attorney Lawrence Buterman argued that Apple was “fully aware that the imposition of an MFN in its agency agreements” would cause the publishers to force the same model upon Amazon. He also said that Apple wanted to “move the whole market off of $9.99" and was successful in raising the prices by as much as 50 percent.

The case is being tried before U.S. District Court judge Denise Cote in New York.

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