Tech Industry

It was Apple's way or the highway, e-book execs say

In the continuing saga between Apple and the Justice Department, book publishers now say the tech giant played a key role in inflating prices.

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NEW YORK -- Two publishers testified this week that their e-book deals with Apple played a key role in their decisions to change digital book terms with Amazon and other retailers, giving weight to the government's antitrust case against Apple.

David Shanks, CEO of Penguin Group USA, and Carolyn Reidy, CEO of Simon & Schuster, said the price-matching clause in their contracts with Apple would have hurt them financially had they not also moved all other e-book retailers to a model where publishers set prices. The publishers had previously sold books at a heavily discounted rate on a wholesale basis, something they couldn't afford given the cut Apple took on sales.

Shanks took the stand Tuesday here at the district court in lower Manhattan, while Reidy testified Wednesday. (Disclosure: Simon & Schuster is owned by CBS, which is the parent company of CNET. Penguin is owned by Pearson). Reidy testified that Simon & Schuster's contract with Apple didn't force it to move Amazon to a publisher pricing model, but that the price-matching clause made the company want to change at the risk of "make[ing] even less money."

"We had the option of not doing that," Reidy said. "We wanted to do that."

Shanks on Tuesday said the price-matching clause in Penguin's pact with Apple was "certainly a major consideration" in changing deal terms with Amazon and other retailers. Shortly after reaching a deal with Apple, Barnes & Noble also moved to a similar model, which meant Penguin would have to price match for both companies.

"Adding those two market shares would be too much of a financial hit for us to match," he said.

The Justice Department also played a clip of Shanks' deposition from several months earlier. In it, he said that the price-matching clause essentially "made it a given" that Penguin would have to move all retailers to a model where they were setting the prices.

"If we were going to consider doing this with Apple, we'd have to do agency [model] with everyone or not do it at all with Apple," Shanks said during his deposition.

Meanwhile, the Justice Department presented evidence of conversations and e-mails between Reidy and her boss, CEO Les Moonves. Reidy had proposed a plan to get Amazon to raise its prices before it had reached a deal with Apple, but Moonves advised against the changes unless other publishers also pursued similar plans.

After the meeting, Reidy sent Moonves an e-mail that said he was right and that "unless other publishers follow us, there's no chance in getting Amazon to change its pricing practices." She added in the e-mail that Simon & Schuster would have to "gather more troops," which the Justice Department said showed Simon & Schuster wanted to work with other publishers. Reidy objected to the characterization and said it also could have meant getting more authors on board with delaying e-book releases.

Both publisher CEOs also testified that Apple kept them updated about negotiations with other publishers. Apple didn't spell out the terms of the other deals, they said, but based on conversations with the company, they knew it was pursuing similar agreements with all publishing houses. It also told them how many deals it had signed, and they were able to figure out who the other parties were.

"At the first meeting, [Apple executive Eddy] Cue said Apple was trying to do the same deal with everybody," Shanks said Tuesday.

And the Justice Department cited an e-mail from Reidy to Apple's Cue that said she would "look forward to an update on your progress in herding us cats." She admitted that Cue had told her how many other companies had reached deals with Apple.

Both CEOs also said they believed a deal with Apple would change the publishing industry and would allow prices to rise, reasons why they pursued deals with the company.

"We embraced the Apple way of selling because it allowed us to change how we sell to other retailers," Reidy said.

The trial centers on now year-old allegations from the Justice Department that Apple colluded with most of the major book publishers to raise prices on e-books, costing consumers what could be hundreds of millions more than they were paying before. All the other publishers that were originally named in the suit have since settled. Apple, which remains the staunch holdout, has fought back, saying its entry to the e-books market in 2010 gave consumers more choice, and helped strengthen the financial viability of the e-book publishing market.

Reidy will take the stand again this afternoon. The trial itself is just in its beginnings, and is slated to run another two and a half weeks.