Apple: We wanted a 'level playing field' for publishers

In testimony, Apple says it wanted to even the odds for publishers big and small with its e-book store.

NEW YORK -- Apple argued that it had fought for equality among publishers big and small as it provided a rare glimpse into its negotiating tactics during the second day of the government's e-book price-fixing trial.

Kevin Saul, one of the key attorneys tasked with making deals for Apple's music, TV, books, and similar businesses, faced more grilling on Tuesday from U.S. Department of Justice attorney Mark Ryan over whether Apple knew and cared about the pricing of its competitors -- a key factor in the case, which accuses Apple of conspiring to control e-book pricing.

"We wanted to treat everybody on a level playing field such that big publishers would be treated the same as small publishers," Saul argued. "It was all about Apple and our ability to launch a bookstore that would be the best on the planet."

During the round of questioning in which he repeatedly answered, "I don't know" or "I don't recall," Saul portrayed Apple as "indifferent" to pricing deals publishers reached with other retailers. He also testified that negotiations with publishers were "difficult" and "challenging" and that many initially rejected some of Apple's "must-have" provisions, including a so-called "most-favored nation" clause that would allow Apple to meet the lower pricing of e-books by any other retailer.

An e-mail exchange between Apple's dealmakers.
An e-mail exchange between Apple's dealmakers. Department of Justice

To make its case, the DOJ showed an e-mail exchange between Saul and Apple's commerce chief Eddy Cue that included a link to an article in The New York Times about Amazon pulling Macmillan books from its e-book store due to pricing issues. In his note to Apple's Cue, Saul asked if he had talked to Macmillan's CEO about the issue. When being questioned by Apple's lawyer Orin Snyder, Saul later said he simply was being proactive in his duties as Apple's attorney, not closely monitoring rivals.

That detail, and Apple's behavior at large, are at odds in the case between Apple and the DOJ. In its complaint, the DOJ says Apple colluded with major publishers to set and fix pricing on e-books. Apple has fought back, saying it was simply negotiating and trying to enter a market dominated by Amazon.

In Tuesday's proceedings, which marked the second day of a three week-long trial, the DOJ said Apple wanted to help the publishers push Amazon to a pricing model where they set the prices. The DOJ's Ryan cited an email between Saul and a Wiley executive wherein the Wiley executive questioned how her company would make money and control pricing in the iBookstore if it always had to match lower pricing found on Amazon. Saul responded that Wiley could move other retailers to an agency model or withhold books from other retailers' digital stores for a certain time. He noted that Apple didn't require that but only was giving advice to Wiley. What it cared about was its own deals, he said.

Apple executives, including Cue and Saul, had only a few weeks to negotiate deals with publishers ahead of the iPad launch in late January of 2010. They held initial meetings with the companies in December but started negotiating in earnest in January. Saul said he spent "well over 100" hours negotiating with the publishers, spending about 12 hours a day working on the issue until the deals were signed. He was expected to have agreements a week before the iPad launch so Apple CEO Steve Jobs could get the wording into the final draft of his iPad keynote slides. Saul noted that after that time, Jobs didn't want to change his slides, but he was working up until the day before the iPad launch on securing the agreements.

"A very effective negotiating strategy was basically telling them the train was leaving the station," Saul said.

David Shanks, CEO of Penguin Group USA, took the stand later in the day on Tuesday. He said negotiations with Apple were difficult, particularly because "it was clear they could take or leave being in the book business."

"If we didn't take items they wanted, they weren't going to be in the business," Shanks said.

The U.S. District Court in New York, the scene of the e-books battle between the DOJ and Apple. Shara Tibken/CNET
Penguin was "very desirous" and "excited" about going into business with Apple because Apple's user base numbered in the millions.

Shanks noted that during his first meeting with Apple's Cue, the executive told him Apple was trying to reach the same deal with all of the publishers. He also said Apple kept him updated about the number of deals it had reached with other publishers. Shanks admitted that going to the agency model with Apple and then Barnes and Noble made him pursue such a deal with Amazon. Penguin and Amazon earlier had talked about an agency model, but the two companies had failed to reach a deal largely because Amazon wanted a three-year contract term, Shanks said.

"We had just launched a new revenue model and wanted to see what happened," he said, adding Penguin didn't want to be locked into a potentially negative deal for several years.

Meanwhile, a major point of contention between Penguin and Apple was the fact that Apple wanted to set price caps on Penguin's older titles, not just its new releases.

"I didn't want to ask permission to put a price on a book or be told what my pricing level would be," Shanks said.

Ultimately, the companies reached a compromise, though Shanks said the final deal wasn't completely what he wanted.

He also noted a big reason for working with Apple was because he was worried that Amazon's $9.99 pricing would cannibalize the hardcover book market and cause people who normally would buy paperbacks to instead buy digital versions of the books.

"There's a fairly delicate ecosystem in publishing," Shanks said. "We're trying to have everybody make a profit -- the author, publisher, and retailer."

The publishing industry has become "more and more efficient as the years go by, but print is definitely going down," Shanks added.

Read More: Apple and the DOJ face off over e-book prices (FAQ)

Updated at 4:10 p.m. ET with comments from Penguin Group USA's CEO.
 

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