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Amazon accuses Apple of hindering Kindle at DOJ e-book trial

updated 11:50 pm EDT, Wed June 5, 2013

Despite continued success, Amazon exec claims agency model hurt

On the third day of the e-book trial brought by the Department of Justice against Apple, the judge heard from an Amazon executive who claimed that Apple's proposal of a shift to the "agency model" of e-book pricing (where publishers set the price rather than retailers) was intended to hurt sales of Amazon's Kindle e-reader and its success as a seller of e-books. Judge Denice Cote, who is conducting the bench trial, also heard from Apple lawyers that the length of negotiations and differences in the contracts it had with publishers prove that it did not collude to set prices.

The DOJ called Amazon Vice President of Kindle Content Russell Grandinetti to the stand, who said that following agreements publishers forged with Apple in 2010, the publishers came to Amazon with an "ultimatum" to change the business arrangement. The publishers, he said, told Amazon that it would either move to the "agency pricing" model as Apple and others had done, or that publishers would withhold new releases in e-book versions for a period of time, a practice known as "windowing" where the printed versions would be exclusive for a period of time -- about seven months, according to Grandinetti -- before the e-book version became available at a lower price.

This may be the same meeting that had been previously described by Penguin CEO David Shanks as being "a very unpleasant meeting" with lots of "yelling, screaming and threatening" by Amazon, which already had a documented history of punishing publishers that didn't adhere to its rules (Grandinetti admitted that he "expressed how unpalatable the choice presented was" in court). Shanks told the judge that all six (at the time) major publishers were "unhappy" with the online giant's routine loss-leader pricing on new releases, sometimes as low as one-third the price of the printed version of the same book.

The publishers felt that Amazon's tactic -- designed to build the market for e-books and in particular its own Kindle reader -- was devaluing the format and harming sales at brick-and-mortar bookstores which were (and still are to a lesser extent) the publishers' bread and butter. At the time, Amazon already had around 90 percent of the e-book market. Grandinetti said that in response to the "ultimatum," he told publishers that Amazon may have to "modify business relationships" were it forced to adopt the agency model.

Publishers had originally responded to Amazon's loss-leader pricing of e-books by raising the wholesale price, but found that Amazon would simply accept a bigger loss on each book sold, being able to absorb the losses across its other businesses. Grandinetti told the court that he believed the publishers colluded to force the agency model on Amazon in an effort to slow down the success of the Kindle.

He admitted that Amazon made attempts to fight the switch away from wholesale, including threatening to end relationships with other publishers -- a point reiterated by Simon & Schuster CEO Carolyn Reidy, who said Grandinetti himself threatened the publisher after they announced they wanted to change to agency model pricing.

After various threats and short-term suspensions failed to bring the publishers to heel, Amazon capitulated and signed a three-year agreement with the publishers to use the agency model. Amazon has continued to be the dominant force in the e-book market, but now has viable competition (from Apple and Barnes & Noble among others) with all players selling e-books for roughly the same price. Grandinetti will continue his testimony on Thursday.

The DOJ's case against Apple largely hinges around the "most favored nation" clause in Apple's agreements with the publishers, which stipulated that publishers could not sell e-books to other retailers for less than what they sold them to Apple. Since Apple had proposed the "agency model," a staple of the print book business for decades, as a model that would keep the e-book business sustainable while giving more control to the publishers as to how to price e-books, the set price from publishers required that Amazon raise its prices in order to maintain agreements with the publishers -- a point the DOJ says cost consumers "hundreds of millions of dollars" in higher e-book prices.

In fact, e-book prices have declined since Apple entered the market and since the "agency model" became the standard across all the digital book storefronts, however new release prices did stagger upwards for a period following Apple's arrival in the market. The move enabled other companies, such as Sony and Barnes & Noble, to compete on more equal footing -- as they were unable to front significant losses on e-books as Amazon was. Reidy supported Shanks' earlier testimony that Amazon had furiously resisted any change from the "wholesale" model that allowed it to set pricing rather than publishers, and that publishers were unhappy both with Amazon's policy of predatory pricing as well as its history of retaliation and bullying of publishers who didn't cooperate.

The DOJ's case was further undermined somewhat by Apple attorney Orin Snyder's repeated pointing out that the MFN clauses in the publisher's contracts varied significantly from publisher to publisher. While the DOJ complained that Apple's MFN clause -- which in and of itself is not illegal -- was designed to "protect Apple from having to compete on price at all while still maintaing [the company's] 30 percent margin," and thus conspired to hike e-book prices, Snyder noted that Apple spent long weeks negotiating five different MFN clauses for each of the five major publishers. Had it actually been a collusion, Snyder said, the terms would have had to have been similar if not identical.

In fact, Penguin CEO David Shanks had testified on Tuesday that Penguin "strongly resisted" the MFN model due to fears that Apple would simply match Amazon's loss-leader pricing (being wealthy from its other businesses like Amazon), plus take its 30 percent commission. Simon & Schuster wanted allowances for book clubs and one-off, limited-time promotions. Each MFN agreement contained different exceptions not present in the other agreements, and Apple Associate General Counsel David Saul on Tuesday described the negotiations as "particularly difficult," sometimes spending "12 hours a day negotiating, emails, exchanging drafts," and calling the process "challenging [and] tiring."

The difference in the agreements between publishers bolster's Apple's claim that it did not conspire, and weakens the government's case, noted two legal experts who commented on the matter to AllThingsD. They described the testimony as a "direct refutation" of one of the key assertions on which the government is building its case, but did not call it a "silver bullet" in Apple's favor. "It does make the government's case harder," said Stanford law school professor Mark Lemley, "but it doesn't mean there was no conspiracy." Berkeley Center for Law and Technology Director Pam Samuelson concurred, saying "it is quite possible for antitrust co-conspirators to mask agreements in restraint of trade by adopting differently-worded documents."

There is also some evidence presented at the trial that publishers -- long before Apple began its negotiations for what became the iBookstore -- were aware that in banding together to convince Amazon to stop undercutting e-book prices, they may be crossing the line into collusion. One publisher representative told another at a 2009 meeting that did not involve Apple (as it had not conceived the iBookstore until late 2009) that they should "double delete" emails related to a meeting about what to do about Amazon, according to the government's evidence.




by MacNN Staff

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Comments

  1. Flying Meat

    Dedicated MacNNer

    Joined: 01-25-07

    "was intended to hurt sales of Amazon's Kindle e-reader and its success as a seller of e-books."
    That's just stupid. If you've got a great product and provide good services, you'll still be successful regardless of the similarity of ebook prices. Just not at the expense of the publishing industry.

    Crazy talk, I know.

  1. Inkling

    Dedicated MacNNer

    Joined: 07-25-06

    Quote: ...the judge heard from an Amazon executive who claimed that Apple's proposal of a shift to the "agency model" of e-book pricing (where publishers set the price rather than retailers) was intended to hurt sales of Amazon's Kindle e-reader and its success as a seller of e-books."

    Oh how terrible! Apple has the unmitigated gall to do something that'd help its sales rather than adopt policies that'd help Amazon sell more ebooks. Every Mac and iPhone users should sympathize and take up a collection to compensate Amazon for this injustice.

    Not. Competition means competing. That Amazon exec strikes me as odd. What he is really saying is, "When Apple did this, we at Amazon had 90% of the ebook market. Now we have only 70%. That's not fair. By all that is right and good we should have it all."

    Whatever the reasons are behind this DOJ lawsuit, whether stupidity or collusion with Amazon, it's missing the real issues that need to be addressed:

    1. Restrictive terms dictated by Amazon, Apple and others. As an author, if I'd like to charge more for my latest ebook at Amazon (because it looks so ugly in their proprietary format I don't want readers to buy it there) and less from Apple (because it looks great in ePub on iPads), then that's my choice. No contractual obligation should dictate otherwise.

    2. We need pressure to open up ebook formatting and distribution, so readers can get an ebook they want from the retailer of their choice and read it in the ereader of their choice. It's what we've always been able to do with print books. It's a worthy long-term goal for ebooks.

    I might add that, as an independent author, I'd be not only delighted to discover that the Big Six publishers wanted to keep their ebook prices high, but that they could quite legally do so. The higher they price their ebooks, the better mine will sell. And while that bit of overpricing folly is happening, a lot of independent new authors will get the chance to be discovered and become successful.

    Forcing the Big Six publishers to lower their prices is only protecting them from their own stupidity. Why should the government do that? Let them blunder and flounder in this new market.

    And you might recall that Steve Jobs rather politely hinted in one of the emails that'll be part of this trial that they were doing just that--that they were trying to price ebooks above their market price.

  1. Charles Martin

    MacNN Editor

    Joined: 08-04-01

    I have to point out that, in fact, Jobs pointed to the $13-15 figure not as a price table, but as the price at which the current publishers could *sustainably* run e-books as a business. In other words, $13-15 was in his view the bottom point at which authors, publishers and customers would all benefit.

    Customers, of course, would love it if e-books sold for no more than $1 -- but that would destroy the publishing industry. The publishing industry would love it if e-books sold at $26 (roughly the same as hardback versions) -- but customers wouldn't buy at that price.

    To me, Steve's proposal -- and that's all it was, remember Apple was ready to walk away from e-books entirely and leave it to Amazon if it couldn't get the publishers on board -- seems like reasonable middle ground. Sticking with Amazon as the monopolist would have been a very bad path to take, seems to me.

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