Although Hachette CEO David Young was ostensibly the star of the seventh day of the Apple price fixing trial, it was Apple lawyer Orin Snyder that really grabbed the court’s attention at the end of the day. Beyond his relentless questioning of a government expert witness about what he called factors other than Apple’s MFN that may have forced Amazon to accept agency pricing, Snyder essentially went ballistic when he learned that Random House COO Madeleine McIntosh would not be required to appear in court.
Government attorneys have also decided not to call Random House CEO Markus Dohle to the witness stand, but that didn’t seem to bother Snyder, though he mentioned it. With his crisp fitted dark suits, rimless eyeglasses and bullet-head haircut, Snyder has offered an interesting combination of energetic geniality and controlled intellectual aggression. When he’s not bearing down on witnesses he seems like the happiest guy in the courtroom, backslapping and bantering with colleagues—even his objections in open court seem to be delivered with a jab, a wink and a smile. But about 5 pm on Wednesday as the day’s session was about to close, U.S. attorney Lawrence Buterman told Judge Cote the government had no questions for McIntosh—a former Amazon executive herself and friend of Amazon’s Laura “Jedi Mind Tricks” Porco, who testified earlier—and would not call her to the stand. Snyder nearly jumped out of his seat to protest.
Indeed he gave a vehement and impassioned plea to Judge Cote about the absolute necessity of McIntosh taking the stand so the Judge can “assess her credibility.” Snyder gave at least two extensive pleas to Cote to allow McIntosh to appear in court, emphatically claiming her absence would be “unfair to Apple,” and that Apple will be “severely disadvantaged” if she does not appear in court. Cote, who reminded Snyder that she established strict rules around witnesses over a year ago—apparently Snyder did not include her on his own witness list and now it’s too late to add her—was attentive but said it was unlikely and “unfair” to everyone if she changed the rules in the middle of the game. In deference to Snyder’s impassioned plea she said she would rule on the request Thursday, but also said she didn’t want to “give you false hope.”
Before this outburst, Snyder and another Apple attorney had grilled economists Richard Gilbert and Orley Ashenfelter over their respective studies on the effects of the switch to the agency model on the trade e-book market. Ashenfelter offered a study, hotly contested by Apple, that essentially said that e-book prices appeared to rise about 17% in the immediate aftermath of the switch to agency pricing by five of the Big Six, with Random House acting as the control group. Gilbert, who dueled with Snyder, offered a study that showed that e-book output at the five agency publishers had declined by nearly 13% (both units and sales) in the wake of agency pricing—remember, the government is charging that Apple was the “ringleader” in a conspiracy to raise prices and that publishers were out to slow the growth of cheap e-books to protect the higher prices of the corresponding hardcover title.
Apple has its own study conducted by a Dr. Burtis—Ashenfelter and Gilbert both claim it is flawed—and not surprisingly it’s a report that claims the overall e-book market has grown since the advent of agency pricing and contends that e-book prices were higher before agency and have since declined. Snyder clashed with Gilbert in particular on the pricing claim, but he also sought to portray agency and the MFN—the ability of Apple to match the lowest price offered by retail competitors—as a “rational” business response to an e-book market blocked by “barriers to entry,” barriers mostly established by Amazon.
“I don’t see much growth in market share under agency by the publishers who entered into agency with Apple,” Gilbert said during one exchange. But Snyder argued that if the output of the five publishers had declined, it was because Amazon stopped offering “marketing and promotional support” to the publishers that switched to agency. He also hammered home the notion that there were “other factors” that forced Amazon to accept agency terms, citing both the entry of the iPad (“a game changer,” Snyder said) and, surprisingly, the entry of B&N’s Nook device, both of which he called “other reasons besides the MFN that made Amazon switch to agency.”
Hachette CEO David Young’s testimony under questioning from U.S Attorney Carrie Syme, and later the Apple lawyers, followed the pattern of other CEOs. Young acknowledged Hachette moved to the agency model despite the fact that, “we would lose margin—from 25% to 30%—compared to the wholesale model,” because “we could establish our own prices.” Young essentially said it was worth losing margin because he believed “we wouldn’t have a viable e-book market; Amazon wouldn’t pay us the old wholesale price once they had established a monopoly.”
Young also said, he wanted even higher prices than $14.99—the cap Apple eventually instituted—“I thought the price caps were too low. We tried very hard to push prices higher but we were persuaded and agreed reluctantly though we got some concessions,” he said. And he also acknowledged that while the MFN “didn’t require” Hachette to move all its resellers to agency, Hachette was quick to do so, because of the nature of the MFN: “It stated the obvious because that’s how we intended to go forward,” he said, “all our resellers needed to be moved to agency because we didn’t want pricing disparity between retailers.”
One theme consistently emerges in this trial—despite selling the vast majority of their books, publishers believe Amazon to be an implacable foe and a de facto monopoly and seem willing to do anything to take back control of the pricing of their e-books. Young said that Hachette was windowing—the delayed release of e-books to protect the price of the corresponding hardcover—in early 2010 and would have continued to do so without agency. “We were protecting our business,” he said, “we could not have our frontlist books—the crown jewels of our list—sold off at bargain basement prices; see $9.99 applied to all our books regardless of the amount of work by our authors or the amount of scholarship. This couldn’t apply to the top of our list, it made no sense.”
Whether this narrative—each CEOs account is similiar—is all simply a description of business as usual in the book marketplace or evidence of collusion will be up to Judge Cote, who followed up with questions to Young about the 30% loss of profit margin (for e-books) that Hachette accepted to move to agency.
“Hachette was in favor of agency not to increase your profits, but to protect the book business,” she asked Young, who quickly said, “Yes.” She also asked Young if windowing was a “bargaining chip against Amazon,” and he again answered cheerfully, “yes. It gave us a chance to have a discussion with Amazon. They believed you couldn’t sell a book for more than $9.99—not true by the way.”
Expert witness Richard Gilbert will continue his testimony today; in addition Apple executive Eddy Cue, a key executive in all the negotiations around the agency model and the launch of the iBookstore, will also testify.