Macmillan CEO John Sargent returned to the witness stand again on the sixth day of the Apple e-book price fixing trial to be followed by Apple executive Keith Moerer, a key figure in the negotiation of the agency pricing agreements in question. Questioning and witness testimony fell into a familiar pattern: detailed government accusations, witness denials and the presentation of extensive government evidence that appears to undermine those denials.
U.S. attorney Mark Ryan immediately focused on what the government charges is collusive contact by the publishers in the period of late December 2009 to early January 2010 when negotiations over the agency model were taking place. The government offered a variety of evidence showing various Big Six publishers in contact during negotiations with Amazon and Apple. Ryan began questioning Sargent about a series of “congratulatory” e-mails Sargent received from a number of Big Six CEOs and executives in the wake of the Amazon/Macmillan “buy button” dispute and Sargent’s open letter to Macmillan authors and agents. In an e-mail dated late January 2010 with the subject line “Brilliant News,” Hachette CEO David Young said, “well done, sir!,” and another from Penguin chairman John Makinson, which said, “I’m full of admiration for your articulation of Macmillan’s position.”
Ryan’s rhetorical question to Sargent was “these are competitors, right?” and he was quick to hone in on a note from Hachette Livre CEO Arnaud Nourry: “I can ensure (sic) you that you are not going to find your company alone in the battle,” as well as an e-mail from Sargent to a literary agent that refers to the dispute and the necessity of Amazon having to “deal with 5 of us,” and Ryan said, “it doesn’t say five deals,” emphasizing that note also says “a deal done by us,” and noting that “you say you did these deals without any contact with other publishers but that’s not true.” Ryan also noted contact between Sargent and HarperCollins CEO Brian Murray regarding Harper’s negotiations with Apple from late 2009 to early 2010 when the agency agreements were signed, “you wanted the optics to look like you worked alone but you had no doubts the other publishers would follow.” But Sargent responded that “we do business with and we compete with each other,” referring to other Big Six publishers. “They are also business partners.” Ryan noted that Sargent also knew in advance of an announcement that five publishers had signed on with Apple, though Sargent emphasized that he “heard it on TV.”
While Sargent was on the defensive under questioning from Ryan, he was nevertheless forthright, consistently acknowledging (counter-intuitively, it would seem, in a price-fixing trial) that he intended to “increase prices” for select groups of new books. And Ryan consistently tried to show that those price increases were collectively (and inappropriately) embraced by Big Six publishers. Under questioning from Apple attorney Orin Snyder, the focus was changed to Amazon’s market position, and Sargent said, “Amazon had an early advantage in the e-book market and established barriers to entry,” particularly pointing to its “below-cost pricing.” Indeed Sargent went on to outline an e-book marketplace that was totally dominated by Amazon in early 2010 and the disadvantages faced by retailers looking for traction. “Many companies were joining the market,” Sargent said, “but they lacked expertise or were undercapitalized and were proving to be unsuccessful.” Sargent continued, “Even B&N, with great experience in physical books, but had no expertise in digital sales or devices. Google wasn’t a good retailer, Sony was a failure. There were lots of vendors with drawbacks.”
Under questioning from Snyder, Sargent emphasized that the Apple agency agreements did not require publishers to shift all their resellers to the agency model. Snyder also offered questions intended to show that all of this interaction between publishers was simply business—not price-fixing. The government contends that the agency model, plus the MFN—which gave Apple the right to match the lowest price of other retailers—essentially made the switch to agency inevitable for all retail partners. “Did Macmillan ever believe they had to move all resellers to agency,” Snyder asked. “Absolutely not,” said Sargent adding that there was no “side deal,” to maneuver resellers to agency. Asked by Snyder why he was asking about the numbers of publishers likely to sign with Apple—the government contends these updates on which publishers were in or out of the deal are evidence of collusion—Sargent said, “I was curious. The more publishers the better for us because the iBookstore had a better chance of success with a broad selection of titles.”
Apple executive Keith Moerer took the stand in the late morning and came under pretty intense questions from the government for the rest of the day. Government attorneys questioned him on the price tiers or price caps—a kind of pricing chart that Apple instituted to make sure that e-book prices would be cheaper than corresponding physical books. But, as publishers such as Carolyn Reidy and David Shanks said in earlier testimony, Big Six publishers worked to get higher price caps, raising the top tier from $12.99 to $14.99 and tying the tiers to the wholesale price of print books. Indeed the government contends that “99% of the publishers priced their e-books at the maximum price caps.”
Moerer also vigorously denied that Apple required publishers to switch all resellers to agency, and said the price tiers were meant to keep publisher’s pricing in check—he said publishers, HarperCollins was cited in particular, “pushed back” on the price caps and wanted “uncontrolled” pricing—and said Apple saw the agency model as a way to avoid “windowing,” the practice of withholding e-books from the market to prevent cannibalization of hardcover sales under the wholesale model. Moerer rejected the government’s contention that they were out to “defeat the $9.99 price point,” arguing that they simply wanted to avoid windowing and give the iBookstore the best chance to succeed. Moerer also tried to emphasize that Apple was actually vigilant against the publishers' more aggressive intentions to raise prices even higher than $14.99. He noted that “Apple is not against low price points,” and sells music, movies, and other media at prices often below $3 in the app store. “We saw a lot of competition with the app store on price and we thought it would be good for e-books,” Moerer said, noting that this is also under an agency model. He also noted that HarperCollins’s Murray had suggested using the agency model (once they had control of pricing) to “experiment” with new kinds of e-books that “could reach new audiences,” and that they could sell for $3 to $5.
But the government focused once again on the role of MFN in the alleged price-fixing scheme. “I didn’t think about the impact of the MFN on other retailers,” Moerer said, “It didn’t matter to us.” Indeed, after Moerer testified that the iBookstore now has “most of the top 100 U.S. publishers,” and that all have MFNs and indeed several—including W.W. Norton, Workman, Perseus, and others—used dual models, agency for Apple and wholesale for other retailers. But under questioning from the government, Moerer admitted that Apple no longer enforces its MFNs—Moerer acknowledged that was true, “since last year” —meaning that the Apple iBookstore currently does not match lower prices.
The government also focused on the relative success of the iBookstore, asking Moerer what market share the store held in the months after launch (about 20%, Moerer said) and what its market share was after several years of operation and adding Random House in 2011 (also about 20%). The government called the iBookstore “a failure,” and charged that “Apple pricing was unfair to consumers,” and that “Apple sold fewer books because of the higher price caps.” Moerer challenged that characterization: “I disagree. E-book sales grew 100% last year at the iBookstore and it had over 100 million customers.” The government countered that “when you drop prices you sell more books,” and Moerer said, “sometimes, yes.”
But the government bluntly said, “Apple forgot to focus on customers, that’s why the iBookstore is a failure.” Moerer: “That’s not true.”
Hachette CEO David Young is scheduled to testify today.