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DOJ e-books trial: Apple's Cue explains 'agency' contracts and pricing, denies culpability

post #1 of 24
Thread Starter 
Apple's vice president of Internet Services and Software Eddy Cue retook the stand on Monday, looking to add clarity to U.S. Department of Justice allegations that the so-called agency model contracts the company signed with publishers caused an overall inflation in e-book pricing.

Eddy Cue
Apple's senior vice president of Internet Services and Software Eddy Cue.


During his testimony, Cue appeared to be in control, putting evidence from the Justice Department in perspective, including emails between himself and late Apple cofounder Steve Jobs.

According to The New York Times, Cue said in court on Monday that Jobs was surprised that Apple was able to "create ripples" in the e-books industry, which at the time was dominated by Amazon.

?Wow, we have really lit the fuse on a powder keg,? Jobs wrote in a January 2010 email. Cue said the comment was not congratulatory in nature, but instead pointed to how much of an impact Apple's ongoing negotiations with five major U.S. book publishers were having on the sector.

The Apple executive did admit e-book prices did rise after the company entered the market with its agency model contracts, but noted the strategy allowed a number of titles which may never have been made into e-books to be sold in the digital marketplace.

The main thrust of the DOJ's case are the agency contracts Apple made with publishing houses. Key to the government's argument is the most-favored-nations clause, which disallows content owners to sell e-books at another retailer for a lower price. Cue said this was for Apple's protection, but the Justice Department asserts the tactic destroyed Amazon's ability to compete on price.

Cue said publishers were ready to rebel against Amazon's wholesale model by employing a windowing strategy that would delay the release of a title's digital version until the more lucrative hardcover iteration had been on shelves for some time. Under wholesale, the Internet retailer bought content rights and sold e-books at or below cost, often at a set $9.99 price.

?Amazon could have negotiated a better deal,? Cue said. ?They had a lot more power.?

With more evidence being released to the public, a particularly interesting correspondence revealed Jobs read certain Apple-centric websites to gain further perspective on his company's dealings.

Jobs email
Steve Jobs' email to Eddy Cue regarding e-book royalty rates. | Source: U.S. DOJ


As a somewhat humorous side note, during the proceedings on Monday, Apple's lawyers used a MacBook, and presumably Keynote, to present its side of the argument. While the defense could easily switch between slides and perform advanced side-by-side and zoom functions, the DOJ could only show one slide at a time, with one video's audio completely failing.

When presiding Judge Denise Cote asked whether the government lawyers were using a Mac, they replied "no," it was a Hewlett-Packard.
post #2 of 24
Quote:
%u201CAmazon could have negotiated a better deal,%u201D Cue said. %u201CThey had a lot more power.%u201D

OK, this has always seemed to me to be the key to the case. I can't for the life of me understand how Apple, with NO presence in the market, was seemingly able to completely steamroll Amazon, who had near total domination of the market.

That argument doesn't make sense. Amazon was, presumably, in a position of power given their sales domination. Apple had *potential* surely. But that's not the same as an already established power in a market.

It has seemed to me since the beginning that what really happened is that Amazon was caught off-guard and blew it, and now they want the court to fix it for them. Sorry, that's weak.
post #3 of 24
Quote:
Originally Posted by AaronJ View Post

It has seemed to me since the beginning that what really happened is that Amazon was caught off-guard and blew it, and now they want the court to fix it for them. Sorry, that's weak.

 

Of course that's what's going on here. This is (and always has been) the root nature of all anti-trust legislation and court pursuits: Less successful competitors lobbying the government to "right" some "wrong" because they failed to compete well.

The state is nothing more than a criminal gang writ large.

Reply

The state is nothing more than a criminal gang writ large.

Reply
post #4 of 24
Quote:
Originally Posted by AppleInsider View Post
...

As a somewhat humorous side note, during the proceedings on Monday, Apple's lawyers used a MacBook, and presumably Keynote, to present its side of the argument. While the defense could easily switch between slides and perform advanced side-by-side and zoom functions, the DOJ could only show one slide at a time, with one video's audio completely failing.

When presiding Judge Denise Cote asked whether the government lawyers were using a Mac, they replied "no," it was a Hewlett-Packard.

 

Emphasis added... HAHAHAHA

post #5 of 24
Quote:
Originally Posted by AaronJ View Post


OK, this has always seemed to me to be the key to the case. I can't for the life of me understand how Apple, with NO presence in the market, was seemingly able to completely steamroll Amazon, who had near total domination of the market.

That argument doesn't make sense. Amazon was, presumably, in a position of power given their sales domination. Apple had *potential* surely. But that's not the same as an already established power in a market.

It has seemed to me since the beginning that what really happened is that Amazon was caught off-guard and blew it, and now they want the court to fix it for them. Sorry, that's weak.

 

 

You pretty much nail the essence of why it is hard to understand why the government is pursuing this case. Look at the government case involving collusion with display manufacturers. There companies like Samsung, Sharp and LG all got together and made a pact on what they would charge companies like Apple for displays. That is collusion because those three companies are competitors all competing for Apple's business.

 

This is completely different. Apple does not compete with the publishers. Moreover, it was the publishers and retailors like Barnes and Noble wanting Agency pricing. The publishers essentially used Apple to gain leverage against Amazon. Apple, however, was not included in any pact. It wanted to sell books, get 30 percent, and not be undercut by Amazon on new releases.  It did not control the pricing at all. The publishers charged what they wanted. 

 

Moreover, as you state, Apple had no market power to force the publishers to do anything they did not want to do. Look at the movie industry. Apple wants to expand its role there, but can not force movie distributors to give it any breaks. Look at the hard time it has negotiating music contracts (like with iTunes Radio). 

post #6 of 24
As we found out last week, when Amazon faced competition, they called their friends in washington, and this is the result.

We need to get rid of the whole concept of "anti-trust" legislation--because literally, they call anything that competes effectively "anti-competitive".

Amazon was "dumping" books below cost to gain marketshare. Since they're buddy buddy with team obama that's ok... but when japan does it to RAM that's a problem. See the contradiction? Plus, consumers are not harmed by getting something below price. Otherwise we need to stop grocery stores from selling coke below price as a loss leader.

Apple's deal give them the same price the item is sold for elsewhere. This isn't "raising prices" this is letting Apple sell for the lowest price. How is that bad for consumers?

That this made it to a courtroom just shows how corrupt the DoJ is.

Hopefully the judge will throw it out when the offense rests.
post #7 of 24
Quote:
Originally Posted by TBell View Post

This is completely different. Apple does not compete with the publishers.
If 14 years ago Microsoft was going to enter some new market like ebooks, who would have been on the stronger side of negotiations? The only thing close to a case the Ministry of Truth can make is that the publishers somehow were forced to agree to Apple's terms because it was obvious they would dominate the market and the only alternative was to be left behind. This is a vertical monopoly.

Looking at what happened, it seems plausible that Amazon saw Apple's dominance as inevitable. Retaliation on their end would have clearly been antitrust, if they aggressively began to play in the publishing realm.

The Ministry of Truth contends that Apple exerted a vertical monopoly. They have not proven it, but that is their opinion.
post #8 of 24
Quote:
Originally Posted by Jessi View Post

We need to get rid of the whole concept of "anti-trust" legislation--because literally, they call anything that competes effectively "anti-competitive".

Real monopoly abuse needs to be prosecuted. Suspicious abuses should be investigated, including Apple's investigation. Then someone should sit down with the evidence and determine if there really is a case. I am at a loss why both the judge and the Ministry of Truth both felt Apple would lose the case, but apparently there is some legal foundation for thinking so.
Quote:
Apple's deal give them the same price the item is sold for elsewhere. This isn't "raising prices" this is letting Apple sell for the lowest price. How is that bad for consumers?

So, why did the publishers agree to Apple's MFN clause? On the face of it, they didn't gain anything by agreeing; it was a one-sided benefit to Apple including a guaranteed margin. If Apple was in that position of strength then *surely* they were exerting monopoly pressure on the poor little publishers¡

In the end, it is in any Apple's fan for this to come to trial and for Apple to be found not guilty. I'm actually most curious why Apple needed to settle in Europe.
post #9 of 24
Quote:
Originally Posted by AaronJ View Post

OK, this has always seemed to me to be the key to the case. I can't for the life of me understand how Apple, with NO presence in the market, was seemingly able to completely steamroll Amazon, who had near total domination of the market.

That argument doesn't make sense. Amazon was, presumably, in a position of power given their sales domination. Apple had *potential* surely. But that's not the same as an already established power in a market.

It has seemed to me since the beginning that what really happened is that Amazon was caught off-guard and blew it, and now they want the court to fix it for them. Sorry, that's weak.

This. I am amazed that anyone can plausibly consider the argument that Apple changed the mar
post #10 of 24
So wait, this DOJ exists to ensure competition in the marketplace? Doesn't this case hinge on an idea that in fact levelled the playing field and broke Amazon's monopoly on books? WTF.

When does it become apparent that labels, studios and networks are simply loan-shark middle men of an overly-authoritarian nature that limit competition and collaboration in content through a skewed and out-dated measure of popularity with utterly opaque funding streams?

NB: May be rhetorical lol.gif
post #11 of 24
Quote:
Originally Posted by aaarrrgggh View Post

If 14 years ago Microsoft was going to enter some new market like ebooks, who would have been on the stronger side of negotiations? The only thing close to a case the Ministry of Truth can make is that the publishers somehow were forced to agree to Apple's terms because it was obvious they would dominate the market and the only alternative was to be left behind. This is a vertical monopoly.

Looking at what happened, it seems plausible that Amazon saw Apple's dominance as inevitable. Retaliation on their end would have clearly been antitrust, if they aggressively began to play in the publishing realm.

The Ministry of Truth contends that Apple exerted a vertical monopoly. They have not proven it, but that is their opinion.

Here is the problem with that theory.

Where is the "monopoly" which Apple could abuse? Windows is a true monopoly. iOS, as fandroids love to remind all and sundry, was never a market share leader. Maybe in tablets, but when you consider ebook readers (this is a lawsuit about ebooks, after all) the ipad is certainly wasn't a market share leader (Amazon had already sold millions of regular Kindles before the ipad was ever demoed).
post #12 of 24
Forget Amazon v. Apple for a second. Let's look at it from a publisher's point of view.

Before the "agency model" Amazon was offering (the small) eBook publishers 30% royalties and they had the ability to deep-discount titles.

The agency model gave publishers (big and small) a 70% royalty (for books over a certain price) and let the publisher set its own price.

Of course Amazon wants the biggest piece of pie it can get and prefers the old model.

I say the neither model is correct. In this day and age, the publisher should set the amount it wants to receive per book sold, and let the book sellers set the price beyond that. For instance, when independent publishers or authors publish an eBook and sells it for $2.99, they are saying that they want to make about $2 per copy sold. Let that be the wholesale price to the bookseller. The bookseller can choose to sell the book for $2 as a loss-leader if they want, which is fine as long as the publisher/author gets their set price.
post #13 of 24
Quote:
Originally Posted by addicted44 View Post

Where is the "monopoly" which Apple could abuse?

I thought it was only a monopoly if abuse could be proven. Having the largest market share is not, in itself, anything but good business. Using that market share to create a barrier of entry for competition, as it was proven Microsoft did with Windows, that's a monopoly. Being popular was never, and should never be, a crime.
post #14 of 24
According to this article:

http://business.time.com/2013/06/17/5-negotiation-tips-from-steve-jobs/

the "power" Apple had may have been the skill of Steve Jobs in negotiation.
post #15 of 24

The link in Steve's email doesn't work anymore (http://iphone.appleinsider.com/#12981-1-0).

It would be very interesting to see which article he was talking about.

 

@AppleInsider: Could you guys update the article with a permalink?

post #16 of 24
Quote:
Originally Posted by Goosedaddy View Post

The link in Steve's email doesn't work anymore (http://iphone.appleinsider.com/#12981-1-0).

It would be very interesting to see which article he was talking about.

 

@AppleInsider: Could you guys update the article with a permalink?

 

My guess would be this one.

 

Jobs was probably concerned about this in the article "Through the service, authors receive 85 percent of net sale proceeds from titles, or 70.5 percent of affiliate sales. The report said the cost to distribute a book on the iPad is free."

post #17 of 24

Thanks Nasser, that's indeed probably it.

Also, thanks for introducing me to web.archive.org! What a great tool.

post #18 of 24
Quote:
Originally Posted by Goosedaddy View Post

Thanks Nasser, that's indeed probably it.

Also, thanks for introducing me to web.archive.org! What a great tool.

You're welcome. Web Archive is an amazing site.

post #19 of 24
"...most-favored-nations clause, which disallows content owners to sell e-books at another retailer for a lower price"

Not sure this is very well put. My understanding is that the Apple-publishers contract had two critical features. One, no one got a better wholesale price than Apple (which as I understand it is the usual meaning of a "Most Favored Nation" clause). Two, Apple reserved the right to match the price of a competitor (read Amazon) if they offered a lower price (ie sold at a loss).

The publishers weren't "disallowed" from "sell[ing] e-books at another retailer for a lower price". The reseller still set the price and actually sold the e-books; Apple just had the right to _match_ that retail price (which they could choose to do or not), but due to the agency model, the wholesale price for Apple would be 70% of that lower price.

I guess I could understand how this put Amazon in a difficult position, and make adopting the agency model the only rational choice, but absent evidence of direct coercion or "ringleading" of the publishers, I'm not sure this violates antitrust law on Apple's part (I am not a lawyer, however). Also, Amazon didn't wait for any market result; after initially pitching a fit, they went to the agency model within days, implying (I think) that it was their choice- they knew having a competitor like Apple in this space with an MFN clause was going to demand changes in their policies; again, absent evidence that Apple organized/orchestrated this, I think it remains a clever business decision on Apple's part, and a good bit of negotiating with five separate publishers's on Cue's part.
post #20 of 24
Quote:
Originally Posted by pdq2 View Post

"...most-favored-nations clause, which disallows content owners to sell e-books at another retailer for a lower price"

Not sure this is very well put. My understanding is that the Apple-publishers contract had two critical features. One, no one got a better wholesale price than Apple (which as I understand it is the usual meaning of a "Most Favored Nation" clause). Two, Apple reserved the right to match the price of a competitor (read Amazon) if they offered a lower price (ie sold at a loss).

The publishers weren't "disallowed" from "sell[ing] e-books at another retailer for a lower price". The reseller still set the price and actually sold the e-books; Apple just had the right to _match_ that retail price (which they could choose to do or not), but due to the agency model, the wholesale price for Apple would be 70% of that lower price.

I guess I could understand how this put Amazon in a difficult position, and make adopting the agency model the only rational choice, but absent evidence of direct coercion or "ringleading" of the publishers, I'm not sure this violates antitrust law on Apple's part (I am not a lawyer, however). Also, Amazon didn't wait for any market result; after initially pitching a fit, they went to the agency model within days, implying (I think) that it was their choice- they knew having a competitor like Apple in this space with an MFN clause was going to demand changes in their policies; again, absent evidence that Apple organized/orchestrated this, I think it remains a clever business decision on Apple's part, and a good bit of negotiating with five separate publishers's on Cue's part.

 

Well, they adopted the agency model because the publishers -- or, at least, Macmillan -- told them that they could still use the old wholesale system, but they wouldn't get books for 7 months after release.  This of course had nothing to do with Apple.  From the testimony by Sargent (Macmillan), Grandinetti (Amazon), and Cue this is apparently went down (according to http://tech.fortune.cnn.com/2013/06/16/apple-ebooks-dinner-doj/):

 

 

 

Quote:
Not only were Sargent and Cue among the trial's most credible witnesses, but Grandinetti's recollection of his Jan. 21 conversation with Sargent is open to interpretation. Grandinetti thought he heard Sargent say that Apple forbade Macmillan from doing business Amazon's way. But what Sargent might have been saying is that the structure of Apple's contract made wholesale with Amazon unprofitable -- a distinction Judge Denise Cote, who will decide the non-jury case -- seems to recognize as significant.

 

[snip]

 

 

 

Quote:
According to Grandinetti, he rejected Sargent's "ultimatum," cut the meeting short, escorted Sargent out of the building, removed the "buy" buttons from all of Macmillan's books -- digital and physical -- and helped Amazon's lawyers draft a memo to the Federal Trade Commission telling the government what had just happened.

 

So, essentially, Grandinetti through a hissy fit, then when they met later, threw Sargent out of the building and went crying like a little girl to the FTC (from which our present situation stems).  And the DoJ fell for it, hook, line, and sinker.

 

Again, I'm really unsure what Apple has to do with any of this, at least in an anti-competitive manner.  Amazon had a major hold on the ebook market.  The publishers had total control of the content, obviously.  Apple suggested something different (according to other testimony), and the publishers went along with it.  As Cue testified, there were no ultimatums from Apple.  Amazon just essentially dropped the ball, and should have negotiated a better deal (my paraphrasing).

 

I think, as others pointed out, this is at least one of (if not the main) reasons why the publishers settled, yet Apple went to trial.  It was the publishers, if ANYONE, who colluded.  Apple knew damn well that they hadn't done anything wrong, and weren't going to settle and essentially say that they had.

post #21 of 24
Quote:
Originally Posted by AaronJ View Post

... So, essentially, Grandinetti through a hissy fit, then when they met later, threw Sargent out of the building and went crying like a little girl to the FTC (from which our present situation stems).  And the DoJ fell for it, hook, line, and sinker. ...

 

The real question is why were the FTC and DoJ so predisposed to do Amazon's bidding and go after Apple when the "case", as is now abundantly clear, was such a house of cards. As this trial unfolds, it's becoming increasingly clear that there was undue influence at work here, and, frankly, I think there needs to be an investigation of that.

post #22 of 24
Quote:
Originally Posted by anonymouse View Post

 

The real question is why were the FTC and DoJ so predisposed to do Amazon's bidding and go after Apple when the "case", as is now abundantly clear, was such a house of cards. As this trial unfolds, it's becoming increasingly clear that there was undue influence at work here, and, frankly, I think there needs to be an investigation of that.

 

I see where you're going with that, and sure it's possible.  But I always try to err on the side of incompetence before I assign blame for intentional acts.  In my experience, incompetence is far more common than actual evil intent.

 

Trust me, though: I'm not disagreeing with you.  I just don't know, at this point.

post #23 of 24
Quote:
Originally Posted by AaronJ View Post

 

I see where you're going with that, and sure it's possible.  But I always try to err on the side of incompetence before I assign blame for intentional acts.  In my experience, incompetence is far more common than actual evil intent.

 

Trust me, though: I'm not disagreeing with you.  I just don't know, at this point.

 

I considered stupidity as a possibility at first, but, as the facts come out, it seems less and less likely. This looks like official corruption pure and simple.

post #24 of 24
Quote:
Originally Posted by anonymouse View Post

 

I considered stupidity as a possibility at first, but, as the facts come out, it seems less and less likely. This looks like official corruption pure and simple.

 

It sure could be.

 

I'm sort of shocked, as the trial has proceeded, that anyone at the DoJ thought that there was enough to go forward with this case in the first place.  That being said, one NEVER knows how a jury (or in this case, a judge) will decide.  Anything can happen in any trial.  But I'm really sort of stunned at the lack of any sort of proof against Apple.

 

This does sound like some sort of sour grapes.  Over what, I have no real idea.  But prosecutors -- or in this case, the DoJ -- don't usually want to go to trial without a VERY good idea that they will win, or unless they have to.  Neither of those seem to be the case here.

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