Apple Executive Testified Publishers Were Responsible For Raising E-Book Prices, Not Apple

An Apple Inc. (Nasdaq:AAPL) executive testified that Apple was not responsible for the industry-wide e-book price increase in 2010 just before Apple entered the market with its iBookstore. A myriad of evidence was brought forth to prove that the publishers were behind the move from Amazon’s wholesale model to an agency model.

Apple is the only defendant in the lawsuit that made waves in 2011, Reuters reports, when the Department of Justice sued five of the big six American publishers -- Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster -- along with Apple for colluding to fix e-book prices. All of the publishers have since reached an agreement with the DoJ.

Previous to Apple’s entrance to the e-book market, Amazon (Nasdaq:AMZN) and other retailers purchased e-books through a wholesale model, according to the Financial Times. Amazon bought the books for $10 and sold them for $9.99.

Eddy Cue, a 24-year Apple veteran and the executive who testified on Thursday, met with the publishers just before Apple entered the market and proposed a shift to an “agency model.” Under the new framework, publishers set their own prices, and Apple would take a 30 percent cut when the books were purchased through its iBookstore, according to the Financial Times.

At the time, Amazon controlled up to 90 percent of the market.

Subsequently, because the agency model would allow them to sell e-books for higher prices, publishers pushed Amazon to adopt the same model. An excerpt from the biography of Steve Jobs, Apple’s legendary CEO who passed away in 2011, showed the extent of the pressure publishers put on Amazon.

“So [the publishers] went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books,'” the Financial News reports.

The move caused prices for new and best-selling e-books to increase, the DoJ contended. Amazon’s shift also contributed to a fall of its market share to 45 percent in 2012, just half of its shares before, Reuters reports.

Cue is contending that Apple has nothing to do with the deals the publishers eventually made with other retailers, whether those retailers sold books on a wholesale or agency model.

“I didn’t care what deals all the publishers got with Amazon, Barnes & Noble or anyone else,” Cue said.

To ensure the publishers do not set their prices too high, Apple set price caps, Cue added. He said he did not know of calls the government said publishers were making between themselves, nor did he think anyone else at Apple knew, Reuters reports.

An email exchange between Jobs and a college student, introduced during court proceedings on Thursday, corroborated Cue’s testimony. Weeks after the launch of the iPad and with it the launch of iBookstore, Seth Humphrey, a college student, emailed Jobs and said that Apple’s “strong-arming Amazon into raising e-book prices” was “detrimental to his reading as a college student.”

Jobs replied three hours later, according to the Financial Times, and said that it was the publishers who were raising the prices, not Apple.

In response, Humphrey said that the price increase came after Apple allowed publishers to set their own prices. Jobs responded again within hours, asking, “How do we stop the publishers from setting their own prices and terms?”

Not everyone is as angered by the shift to an agency model in the publishing industry as Humphrey is, however. In an editorial published in the Wall Street Journal in 2012, Senator Charles Schumer, D-N.Y., said the lawsuit against Apple and the publishers “could wipe out the publishing industry as we know it.”

Schumer argued that the lawsuit could make it more difficult for new authors to get published if Apple adopted the wholesale model.

"If publishers, authors and consumers are at the mercy of a single retailer that controls 90 percent of the market and can set rock-bottom prices, we will all suffer," Schumer wrote in reference to Amazon. "Choice is critical in any market, but that is particularly true in cultural markets like books. The prospect that a single firm would control access to books should give any reader pause."