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How Apple shook up the electronic book market

Joab Jackson | June 18, 2013
Apple didn't try to fix or raise the prices of electronic books when it entered into the market in 2010, according to Apple Senior Vice President Eddy Cue. Rather, he says, the company was only working to ensure a profit for itself.

The agency model, on its own, "doesn't even raise an antitrust issue, because the seller never owns the book," Hylton said.

But while a manufacturer and reseller can work together to determine a price, multiple manufacturers cannot collude together to set prices. The plaintiff, in this case the DOJ, has to make a compelling case that this conspiracy actually took place, Hylton said.

When questioned by DOJ attorney Lawrence Buterman, Cue said he was unaware that publishers were discussing the proposed Apple deals among themselves. He had been unaware, he said, that the CEOs of the largest book publishers had been holding talks among themselves for at least a year prior to meeting with Cue.

What the publishing CEOs were discussing was the issue of how Amazon was selling electronic books for its Kindle book reader, which they called the "$9.99 problem." According to the DOJ, the publishers were frustrated that Amazon was selling their best-selling titles at US$9.99 each, which was, in many cases, less than what Amazon was paying for those electronic books.

The publishing companies feared that if Amazon continued to offer bestsellers at such a reduced rate, the public would come to assume that would be the natural price for a book. They also worried that Amazon was moving to disintermediate publishers, or to cut them out of the publishing cycle and deal directly with authors.

Enter Apple. In December 2009, Apple was preparing to launch its iPad, which Cue thought would make for a terrific electronic book reader. It was Cue's idea for Apple to enter the market for electronic books. Apple CEO Steve Jobs thought the format wouldn't work for either the iPhone or Mac laptops or desktop computers. But the iPad would make a fine reader for electronic books, offering features such as enhanced color and video, Cue thought. Cue felt personally close to Jobs; he had worked closely with him for about 16 years and was aware Jobs was dying. (Jobs died in 2011.) The project to set up the iBookstore "had extra meaning to me," he told the court. 

Cue had to work fast, though. Jobs was planning to introduce the iPad to the world in little more than a month, on Jan. 27, 2010. Cue would need to have preliminary agreements from all the major publishers in place by then for Jobs to include iBookstore in his presentation. 

According to Cue's testimony, he initially approached publishers individually in December 2009 about reselling their books in a typical wholesale model. In Cue's first meeting with a publisher, with HarperCollins, an executive floated the idea of working with Apple under an agency model. Cue took the idea back to Jobs, who approved the basic concept. The company was already using that model for both its App Store and its iTunes music and video service. So over the next few weeks, Cue and his team worked up an agency plan, one that guaranteed Apple a 30 percent cut of each sale. 

 

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