Apple Senior Vice President Eddy Cue offered only short answers in testimony Thursday in federal court when questioned by federal prosecutors trying to solidify their case that Apple, along with five of the largest book publishers, worked together to illegally set the prices of electronic books for the market.
Apple co-founder Steve Jobs, who was instrumental in the negotiations, cast an even larger shadow across the proceedings. Cue, who is senior vice president of Internet software and services, led the effort in late 2009 through 2010 to get publishers to release their titles on Apple's iBookstore reader for the soon-to-be-launched iPad, and consulted frequently with Jobs.
"Steve and I worked very closely on this," Cue said.
Asked who had decision-making authority regarding e-books pricing, Cue replied that Jobs, who died in October 2011, was the ultimate arbitrator for all decisions made at Apple during that time.
The Department of Justice charges that Apple colluded with the book publishers, including Harper Collins, the Penguin Group and Simon & Schuster, to set up a new pricing model, in violation of the Sherman Antitrust Act. The agency has offered a large collection of emails and phone records that strongly suggest that publishing company CEOs, Jobs and Cue worked together to hammer out an agreement. DOJ prosecutors spent the morning Thursday asking Cue to elaborate on his emails with publishing CEOs and Jobs.
According to the Justice Department, book publishers were worried in 2009 that Amazon, then the largest retailer of electronic books, was lowering the perceived wholesale value of the books, due to its strategy of discounting books to $9.99.
Apple, eager to get into the e-book business with the iPad, used the "Amazon threat" as a calling card for the publishers, according to the DOJ. The company presented the idea of moving the book industry from a wholesale model, where retailers buy books at the wholesale rate and then charge whatever price they want, to an agency model. Under that model, the publisher sets the price and the seller, in this case Apple, gets a fixed percentage. Apple pioneered the agency model in the electronic realm with its App Store.
With the agency model, Apple could offer the publishers the ability to set the prices at whatever level they liked, such as $12.99, $14.99 or $16.99. Crucial to this deal, originally, was the stipulation that all the publishers would switch over to the agency model, and that they would switch all the retailers, including Amazon, to this model of book purchasing.
Cue, who often worked in between the CEOs and Jobs himself, is the central witness in the trial at the U.S. Southern District Court of New York, with District Judge Denise Cote presiding. Cue confirmed the emails and other documentation that the DOJ had assembled to show this chain of events, but rarely elaborated in his answers to DOJ questions, even when he disagreed with the prosecutors' assertions.
When the prosecutors asked Cue if, for instance, the publisher CEOs were talking among themselves about Apple's proposed move to the agency model, Cue denied knowing anything about their discussions, or even admitting that he suspected that they were talking among themselves. The DOJ pointed to records of more than 100 phone calls the publisher CEOs had made among themselves in one month after Apple proposed the agency model. "No one [at Apple] had knowledge that publisher meetings were happening," he said.
Cue was careful to point out that while Apple was promising that it could sell books at the publishers' preferred rate, it made no promises as to whether these preferred rates would be accepted by other retailers. At one point, Apple offered to move away from the agency model, should the publishers offer it "Most Favored Nation" (MFN) pricing, in which the publishers guaranteed that Apple could sell their e-books, with the 30% markup, at the lowest price offered by any retailer. The publishers balked at this proposal, however.
The DOJ also pointed to an email that one student sent to Jobs asking why Apple was raising the price of e-books, which the student summarized as greedy. Jobs responded in an email to the student that it was the publishers, not Apple, who were raising the prices. The DOJ asserted that Apple was only interested in ensuring that it would get a 30% cut of the sales, which was in line with what Apple gets with its sales of other content, such as music and television shows.
Cue also downplayed any assertions that Apple was attempting to replicate what Amazon was doing with its Kindle-based e-book selling. The DOJ pointed to one email exchange between Cue and Jobs, in which Jobs asked if Amazon is selling self-published books, and Cue replied that it was, so Jobs then decided to consider the idea for Apple, and later included self-publishers. But when the prosecutor then asserted, from this exchange, that Jobs was basing his decisions on what Amazon was doing, Cue responded that the idea was "incorrect," without elaborating.
Cue will take the stand again later Thursday and is expected to be more forthcoming with details when questioned by Apple's chief counsel, Orin Snyder.