Focus, criticism shifts to Amazon in Apple e-book trial

The online retailing giant is accused of being a bully by two publishing company CEOs who testified during the trial.

Declan McCullagh/CNET

NEW YORK -- Amazon acted like a bully and threatened the publishers when discussing a new e-book sales structure, according to two publishing CEOs who testified during the Apple e-book price-fixing trial over the last two days.

David Shanks, CEO of Penguin Group USA, and Carolyn Reidy, CEO of Simon & Schuster, said Amazon's e-book pricing, in which the publishers had little power, was the main factor that drove them to pursue deals with Apple that allowed them to set their own prices. But when the publishers attempt to change their agreements with Amazon to fall more in line with Apple, Amazon balked.

"They yelled and screamed and threatened," Shanks said during his testimony during district court on Tuesday. "It was a very unpleasant meeting."

The publishers portrayed themselves as victims of Amazon, which had a virtual lock on the e-book market. Apple, meanwhile, attempted to draw parallels between itself and Amazon, showing that the different nuances of their respective deals are par for the course in the industry, and not a conspiracy to inflate prices.

The U.S. Department of Justice and Amazon, conversely, accused the publishers of pursuing the publisher-centric model to slow down the growth of the e-book market and preserve the price of traditional books.

Reidy, who took the stand Wednesday, noted that when she notified Amazon about her company's plans to go to the new publisher-centric pricing route -- known in the industry as an agency model -- Amazon made threats before ultimately negotiating with Simon & Schuster. (Disclosure: Simon & Schuster is owned by CBS, which is the parent company of CNET.)

Russell Grandinetti, the Amazon executive tasked with reaching book deals for the Kindle, initially told Reidy that he wasn't surprised to hear she was pursuing an agency model, she testified. Grandinetti then asked if Simon & Schuster would agree to an agency model for a temporary time before changing back to wholesale or pursuing some hybrid approach, she said.

When Reidy rebuffed that proposal, Grandinetti called Reidy a third time and threatened to stop selling not only Simon & Schuster's digital books but also its physical books.

"If you're going to do this, we have to look at the whole business," Reidy reported Grandinetti saying.

Despite the threats, Amazon and Simon & Schuster ultimately reached an agreement for an agency model with a number of nuanced provisions and clauses.

Amazon, meanwhile, took its turn portraying itself as a victim as well. The company believed it was in the position of having to shift to an agency model "because some publishers wanted to slow down the growth of the Kindle," Grandinetti said during his grilling by an Apple attorney later Wednesday.

Reidy, however, said Simon & Schuster wasn't entirely motivated by the desire to preserve the pricing of traditional and digital books, but conceded she may have made such comments in the past. She noted that it's not necessarily true that publishers make more money from print books than digital versions.

Grandinetti noted that Amazon wanted to make sure it had a "level playing field" with other retailers, including Apple, when it came to its publisher deals. It pursued longer-term contracts, including a three-year pact with Macmillan, as well as provisions that would allow Amazon to match pricing, content, and other business models offered to other companies. For example, if a publisher decided to let another retailer operate under a wholesale model, Amazon would have the option to do so as well.

"We didn't want to move to agency," Grandinetti said. "We were presented with ultimatums from publishers" that Amazon would lose access to their books if it didn't change its deal terms.

Grandinetti will take the stand again Thursday.

 

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