Penguin Books CEO gives mixed testimony in Apple e-books suit

Posted:
in General Discussion edited January 2014
On day two of the U.S. Department of Justice's antirust suit against Apple, Penguin Books CEO David Shanks took the stand to offer testimony regarding the Cupertino company's role in an alleged e-book price fixing scheme.

iBooks


According to in-court reports from Reuters, Shanks testified on Tuesday that Apple inserted a provision in its e-book contract with Penguin which forced the publisher to modify its existing agreements with other retailers, including market leader Amazon.

The stipulation Shanks referred to is Apple's most favored nations clause, which is part of the so-called "agency model" that holds a publisher can set content pricing as long as it doesn't sell said content to another retailer for less.

"The fact that the parity clause was in the contract more or less made it a given we'd have to be at agency," Shanks said in a previously recorded deposition that was played in court.

In his testimony, Shanks added that Apple's clause was "certainly a factor" in moving rivals over the agency model where publishers have control over pricing. Retailers like Amazon use the wholesale model where content owners sell bulk rights to retailers, which can resell the e-books at or below cost.

The most favored nations system is one of the DOJ's targets in its suit, as it claims consumers were hurt by fixed prices resulting from collusion between Apple and five major publishing houses. All the accused publishers, including HarperCollins, Simon & Schuster, Hachette Book Group and Macmillan, settled out of court.

Penguin was the last of the five publishers to settle with the Justice Department, doing so in December 2012. The firm also paid a $75 million settlement to 33 state attorneys general for a parallel suit in May.

While the first part of Shanks' testimony appeared to strengthen the government's case, upon cross-examination sentiment shifted toward Apple. The CEO admitted that there was concern over the low content pricing from Amazon, which at the time was one of Penguin's biggest customers and accounted for some 90 percent of its e-book sales. This suggests, as Apple had argued, the negotiations were tough, making collusion a less likely option.Penguin CEO David Shanks admitted there was concern over Amazon's wholesale pricing model.

Under Amazon's wholesale model, however, the Internet retail giant was selling new hardcovers at prices far from the average normally fetched for first run titles. Publishers routinely release hardcover versions ahead of cheaper paperbacks in a profit-making practice called "windowing."

"What transpired was by having e-books now at $9.99, it was cannibalizing hardcover editions, which sold on average at $26," he said.

Later, Shanks said Penguin "strongly resisted" the most favored nations model as it feared Apple would not only match Amazon's low prices, but also require its usual iTunes commission. In the end, however, Penguin inked a deal after seeing the other major publishers hop on board.

Once the most favored nations system was established, with bookseller Barnes & Nobel also adopting the model, Penguin tried to get Amazon to move to it as well. According to Shanks, the market leader didn't take the news well.

"They yelled and screamed and threatened," he said. "It was a very unpleasant meeting."

Shanks was the first executive from the five publishing houses to testify in court. Also scheduled to take the stand during the three-week trial is Apple's vice president of Internet Software and Services Eddy Cue.
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Comments

  • Reply 1 of 67
    scotty321scotty321 Posts: 313member
    And they're going after Apple instead of Amazon because...???
  • Reply 2 of 67
    gtrgtr Posts: 3,231member


    Sheesh.


     


    Apple needs to treat their government department with the respect that they deserve.


     


    Pay 'em, f*ck 'em, then kick 'em out of your bed, Apple.


     


    image

  • Reply 3 of 67
    The DOJ views Amazon's model as benefitting the consumer, which it probably does in the short term. But in the medium term it destroys quality publishing, by devaluing quality content. Of course it has also led to a de facto monopoly by Amazon, but the DOJ would claim that's a separate issue, and maybe they'll pursue them next. If Amazon were broken up into separate entities, I wonder if selling books as loss leaders would still be a viable practice.

    In Germany, the agency model was actually required by law, and has meant bookshops were able to survive much longer (not being undercut by Amazon), and publishers can afford to publish and develop a much broader range of content (which they do).
  • Reply 4 of 67
    jessijessi Posts: 302member
    So, let me get this straight. Apple has a deal where publishers can set prices, and they have to offer the lowest price on iBookstore. And the DoJ claims this "hurt consumers" because it "fixed prices"? Flexibile pricing with a proviso that the consumer be given the lowest price offered anywhere is neither fixed nor hurting consumers.

    This persecution is so illogical it proves that it is politically motivated.

    Which is why we need to repeal the entirety of anti-trust regulations--which have always been used anti-competitively to favor one business over another-- in this case, near monopolist Amazon is being defended from having to compete with Apple when Apple dared to offer publishers better terms.

    Really, people should belong in jail for this-- and I mean, people in the government. It's criminal.
  • Reply 5 of 67
    jessijessi Posts: 302member

    Quote:

    Originally Posted by MattBookAir View Post



    The DOJ views Amazon's model as benefitting the consumer, which it probably does in the short term. But in the medium term it destroys quality publishing, by devaluing quality content


    FWIW, in the 1990s when Japanese companies were selling RAM below "market cost", which greatly benefited consumers of RAM and american businesses selling computers with RAM, the DoJ and others claimed that this was "hurting consumers" and was "dumping."


     


    It's so political... they just claim whatever they want. 


     


    But no doubt, someone subsidizing something benefits the buyers.  We really need to shut down the DoJ.  All the money they waste on market manipulation like this hurts consumers, and that's on top of the money they blow in taxes.

  • Reply 6 of 67
    Keep in mind that Steve was trying to get the price of textbooks down. Way down. From 100 dollars to as high as 200 dollars. That's what the 15 dollar price point meant for our society. Trash pop novels would go up by 1 or 2 dollars, but textbooks would come down by 85 to 185 dollars.

    There was no collusion on the part of Apple. Not one shred of evidence to support that. The email to Murdock and the 15 dollar price point was really about textbooks. Understand that and you'll understand what Steve was really trying to do.

    Ask the DOJ this. Is America better off with 15 dollar science and math textbooks or is it more important that we all save 2 dollars on 50 shades of pink?
  • Reply 7 of 67
    mjtomlinmjtomlin Posts: 1,876member
    They're trying to spin it backwards.

    Apple didn't insist they raise their prices, they insisted that their users don't get shafted by higher prices, so they made sure that the publishers sold their content for the same prices that was sold elsewhere.

    Apple was in no position to collude, they had no leverage... they had ZERO percent of the ebook market. It sounds a lot to me like the publishers got together and Apple was caught in the middle. I'm guessing that's why they all settled out of court.
  • Reply 8 of 67
    hill60hill60 Posts: 6,992member

    Quote:

    Originally Posted by scotty321 View Post



    And they're going after Apple instead of Amazon because...???


     


    Apple aren't playing by the "rules", the pigs need more in the trough, hence the Capital Hill shakedown.

  • Reply 9 of 67
    hill60hill60 Posts: 6,992member

    Quote:

    Originally Posted by applesupertramp View Post



    Keep in mind that Steve was trying to get the price of textbooks down. Way down. From 100 dollars to as high as 200 dollars. That's what the 15 dollar price point meant for our society. Trash pop novels would go up by 1 or 2 dollars, but textbooks would come down by 85 to 185 dollars.



    There was no collusion on the part of Apple. Not one shred of evidence to support that. The email to Murdock and the 15 dollar price point was really about textbooks. Understand that and you'll understand what Steve was really trying to do.



    Ask the DOJ this. Is America better off with 15 dollar science and math textbooks or is it more important that we all save 2 dollars on 50 shades of pink?


     


    50 shades came from a different publisher, it was $9.99 in Apple's iBook store.


     


    Such is the power of a free and open market.

  • Reply 10 of 67
    starbird73starbird73 Posts: 538member
    So this guy is a CEO, and says in one paragraph that Apple allowed the publishers to set the prices, then that he "Later, "strongly resisted" the most favored nations model as it [B]feared Apple would not only match Amazon's low prices[/B], but also require its usual iTunes commission. In the end, however, Penguin inked a deal after seeing the other major publishers hop on board."

    Which is it? I have a feeling Apple is fine with this circus because they know they did nothing wrong.
  • Reply 11 of 67
    herbapouherbapou Posts: 2,221member
    Imo the problem is not the agency model, its the "books cant by cheaper elsewhere" rule made by Apple. The end results is the same prices everywhere. I am affraid Apple will lose this. It should be, you cant sell for a lower price BEFORE the reseller cut elsewhere. That would allow different priçes depending on the reseller cut percentage.
  • Reply 12 of 67
    charlitunacharlituna Posts: 7,215member
    hill60 wrote: »
    Apple aren't playing by the "rules", the pigs need more in the trough, hence the Capital Hill shakedown.

    Perhaps they are, perhaps they aren't.

    But even if Apple isn't doesn't mean that Amazon was or is. They have the same MFN clause that Apple demanded which is why they could get away with offering books in the Starbucks promo for free despite having no such deal with the publisher for that sale. The MFN gave them the power.

    But no one is going after Amazon.

    As for Apple. What exactly does the contract say. The implication is that the clause says that all retailers must be forced to go to agency but how they read it and what it says are two different things. So lets see the literal wording. Not just hear some DOJ lawyers spin on what the clause means
  • Reply 13 of 67
    jollypauljollypaul Posts: 328member


    I get the feeling the DOJ is more interested in a show piece win than finding the truth. Start with a conclusion and work backwards. The publishers who did wrong settled, and I bet part of that settlement was a promise to help drag Apple into their mess.

  • Reply 14 of 67
    charlitunacharlituna Posts: 7,215member
    starbird73 wrote: »
    So this guy is a CEO, and says in one paragraph that Apple allowed the publishers to set the prices, then that he "Later, "strongly resisted" the most favored nations model as it feared Apple would not only match Amazon's low prices, but also require its usual iTunes commission. In the end, however, Penguin inked a deal after seeing the other major publishers hop on board."

    Which is it? I have a feeling Apple is fine with this circus because they know they did nothing wrong.

    I would say a key bit is the 'resisted'. Allegedly Apple was in cahoots with the publishers so why the resistance. Doesn't fair well for convincing someone that there was a conspiracy going on.

    As for his fear, yep they would take their 30% even if they invoked the MFN. That was how it was all written. And I bet if we could see the actual contract there is nothing about how everyone else must be forced into agency model terms. So that move was the publishers pushing that themselves to avoid this feared situation. And no one likely has proof otherwise
  • Reply 15 of 67
    charlitunacharlituna Posts: 7,215member
    herbapou wrote: »
    Imo the problem is not the agency model, its the "books cant by cheaper elsewhere" rule made by Apple. The end results is the same prices everywhere. I am affraid Apple will lose this. It should be, you cant sell for a lower price BEFORE the reseller cut elsewhere. That would allow different priçes depending on the reseller cut percentage.

    In most cases there is no cut percentage. Most items including traditional books, are sold on the warehouse model. The only diff is that publishers were allowed to set pricing guidelines which limited how much someone could mark something down. Which is why, for example, you never saw a new Harry Potter on sale for 75% off at release.

    But when Amazon started their Ebook program they didn't sign such deals so they got pricing control and all the publishers could do was set the warehouse price. Amazon had the same MFN and defended it as saying the that publishers got their money so they had no right to gripe if Amazon was pricing for a loss. And so on. And no one has ever said boo about this 'illegal' activity from them. So the DOJ saying MFNs are illegal is thin when they aren't calling out Amazon, etc as well
  • Reply 16 of 67
    jragostajragosta Posts: 10,473member
    On day two of the U.S. Department of Justice's antirust suit against Apple, Penguin Books CEO David Shanks took the stand to offer testimony regarding the Cupertino company's role in an alleged e-book price fixing scheme.

    According to in-court reports from <em>Reuters</em>, Shanks testified on Tuesday that Apple inserted <a href="http://www.reuters.com/article/2013/06/04/us-apple-ebooks-trial-idUSBRE9531E520130604">a provision</a> in its e-book contract with Penguin which forced the publisher to modify its existing agreements with other retailers, including market leader Amazon.

    The stipulation Shanks referred to is Apple's most favored nations clause, which is part of the so-called "agency model" that holds a publisher can set content pricing as long as it doesn't sell said content to another retailer for less..

    The only problem for the DOJ is that MFN clauses are legal. There's nothing in this testimony that supports the claim that Apple did anything wrong.

    It's looking more and more like grandstanding by the DOJ (just like the Senate hearings). Throw out lots of stuff that might look bad to a layman but which doesn't break any laws. Try to extort some kind of concessions from Apple.
  • Reply 17 of 67
    jragostajragosta Posts: 10,473member
    herbapou wrote: »
    Imo the problem is not the agency model, its the "books cant by cheaper elsewhere" rule made by Apple. The end results is the same prices everywhere. I am affraid Apple will lose this. It should be, you cant sell for a lower price BEFORE the reseller cut elsewhere. That would allow different priçes depending on the reseller cut percentage.

    Really? So please explain which law makes most favored nation clauses illegal?

    In fact, MFN clauses have been upheld by the courts and are completely legal. The fact that you're alleging that Apple will lose solely because of MFN suggests that you have absolutely no experience with contract law.
  • Reply 18 of 67
    gatorguygatorguy Posts: 20,764member
    jragosta wrote: »
    Really? So please explain which law makes most favored nation clauses illegal?

    In fact, MFN clauses have been upheld by the courts and are completely legal. The fact that you're alleging that Apple will lose solely because of MFN suggests that you have absolutely no experience with contract law.

    FWIW:
    http://www.ftc.gov/opa/2012/08/mfn.shtm
    "The most commonly used MFN provisions guarantee a customer that it will receive prices that are at least as favorable as those provided to other buyers of the same seller, for the same products or services. Although at times employed for benign purposes, MFNs can under certain circumstances present competitive concerns. This is because they may, especially when used by a dominant buyer of intermediate goods, raise other buyers’ costs or foreclose would-be competitors from accessing the market. Additionally, MFNs can facilitate collusion and stabilize coordinated pricing among sellers."

    Even someone as experienced at contract law as yourself might still be able to learn a few new things from researching the subject. Stuff changes.
  • Reply 19 of 67
    timgriff84timgriff84 Posts: 909member

    Quote:

    Originally Posted by Jessi View Post



    So, let me get this straight. Apple has a deal where publishers can set prices, and they have to offer the lowest price on iBookstore. And the DoJ claims this "hurt consumers" because it "fixed prices"? Flexibile pricing with a proviso that the consumer be given the lowest price offered anywhere is neither fixed nor hurting consumers.



    This persecution is so illogical it proves that it is politically motivated.



    Which is why we need to repeal the entirety of anti-trust regulations--which have always been used anti-competitively to favor one business over another-- in this case, near monopolist Amazon is being defended from having to compete with Apple when Apple dared to offer publishers better terms.



    Really, people should belong in jail for this-- and I mean, people in the government. It's criminal.


    It has essentially fixed prices because it's started a rule where no other retailers can sell a product cheaper than Apple. In turn no other company would want to be more expensive than Apple so the price is fixed the same everywhere. The fact that the price is chosen by Penguin isn't relevant as it isn't there price that there's an issue with.


     


    These rules effectively remove any price competition between the retailers on books as none of them would be able to lower the price for special offers etc.

  • Reply 20 of 67
    ericthehalfbeeericthehalfbee Posts: 4,078member
    ^ "especially when used by a dominant buyer"

    So Amazon then?

    Edited: Meant for GG.
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