United States of America v. Apple, Inc.

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“Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that….”

“Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that….”

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  • 1. United States of America v. Apple, Inc.Opening StatementJune 3, 2013
  • 2. PX-0514“Amazon screwed it up. It paid thewholesale price for some books, butstarted selling them below cost at$9.99. The publishers hated that….”“So we told the publishers, ‘We’ll goto the agency model, where you setthe price, and we get our 30%, andyes, the customer pays a little more,but that’s what you want anyway.’”
  • 3. DX-086“Hachette• Unhappy with $9.99 price point, one of three majorpublishers to announce its intention to hold backebooks at time of hardcover release (up to fourmonths). Other two publishers are Simon & Schusterand HarperCollins.RandomHouse• doesn’t like the $9.99 price point, but doesn’t wantor support windowing. hasn’t said so publiclyPenguin• not happy about $9.99 price point, but hasn’tannounced a position publicly; clear from the CEO,though, that they don’t view a $9.99 eBook assustainable model competing with much higherpriced physical books”* * ** * *
  • 4. DX-086“Clearly, the biggest issue isnew release pricing and theywant a proposal from us.”
  • 5. Apple Sends Publishers Identical Proposed Deal TermsPX-0021, PX-0473, PX-0476, PX-0041, PX-0040, PX-0306“[A]ll resellers of new titles need tobe in agency model….”“…realistic pricing….”“We think these agency termsaccomplishes all the goals weboth have.”
  • 6. PX-0521 and PX-0174“They believe that this is the bestchance for publishers to challenge the9.99 price point….”“They decided they had to come upwith a way that would move the wholemarket off 9.99 and they think anagency model is the only way to do it.”
  • 7. PX-0613“I’m hoping that Wednesday’s event...will sustain us as we move throughthe next steps in this process ofchanging the industry.”Carolyn Reidy“You are a real leader of the bookindustry.”Eddy Cue
  • 8. PX-0094“The optics make it look like Istood alone, but in the end I hadno doubt that the others wouldeventually follow.”
  • 9. DX-434
  • 10. e-Book Business Prior to Apple’s Entry
  • 11. Wholesale Model for Print BooksEstablishes list price for bookand sells it to retailer forpercentage of list price(usually 50%)PublisherEstablishesretail price forconsumerRetailerPaysretail priceConsumer
  • 12. Original Wholesale Model for e-BooksEstablishes digital list pricetypically 20% lower than printlist price and sells book toretailer for percentage ofdigital list price (usually 50%)PublisherEstablishesretail price forconsumerRetailerPaysretail priceConsumerEXAMPLE EXAMPLEEXAMPLE$25 list price, $20 digital priceWholesale price soldto the retailer$10.00 $9.99$9.99Retail price soldto consumer
  • 13. Publishers Revise Wholesale Model for e-BooksEstablishes digital list priceequal to print list price andsells book to retailer forpercentage of digital listprice (usually 50%)PublisherEstablishesretail price forconsumerRetailerPaysretail priceConsumerEXAMPLE EXAMPLEEXAMPLE$25 list price, $25 digital priceWholesale price soldto the retailer$12.50 $9.99$9.99Retail price soldto consumer
  • 14. PX-0219“I am told Random House is concerned aboutthe future of e-books and the potentiallydominant role played by Google and Amazon.Would it make sense for the 2 of us to havemeetings / diner [sic] with Markus Dohle, BrianMurray, John Sargent and whoever, in order todiscuss options?”Arnaud Nourry“I am having dinner with that group onJanuary 29 and will raise the matter then.”David Young
  • 15. PX-0274“Completely confidentially, Carolynhas told me that they are delaying thenew Stephen King, with his fullsupport, but will not be announcingthis until after Labor Day so that shecan have an enjoyable vacation!”
  • 16. PX-0274“I think it would be prudent for you todouble delete this from your emailfiles when you return to your office.”
  • 17. PX-0133“It will not be possible for anyindividual publisher to mount aneffective response, because of both theresources necessary and the risk ofretribution, so the industry needs todevelop a common strategy.”“Competition and collaboration”“…we do appear to be on a collisioncourse with Amazon, and possiblywith Google as well.”
  • 18. PX-0344“You are absolutely correct: we’ve alwaysknown that unless other publishers followus, there’s no chance of success in gettingAmazon to change its pricing practices.”“And of course you were right thatwithout a critical mass behind us Amazonwon’t ‘negotiate,’ so we need to be moreconfident of how our fellow publisherswill react if we make a move like this.”“We will keep thinking of how toattack the problem (as we perceive it) ofcurrent eBook pricing.... But clearly weneed to ‘gather more troops’ andammunition first!”
  • 19. Apple’s Entry
  • 20. Apple Facilitates Publisher CommunicationBrian MurrayEddy CueOn December 8, Mr. Cuereaches out to Mr. Murrayand Mr. Dohle to set up callsfor the following dayDecember 8, 2009PX-0314
  • 21. Apple Facilitates Publisher CommunicationOn December 10 at 9:47,Mr. Murray sends aninternal e-mail concerninghis call with Mr. CueDecember 10, 2009PX-304Brian MurrayBrian MurrayEddy CueOn December 8, Mr. Cuereaches out to Mr. Murrayand Mr. Dohle to set up callsfor the following dayDecember 8, 2009PX-0314
  • 22. On December 10 at 9:47,Mr. Murray sends aninternal e-mail concerninghis call with Mr. CueDecember 10, 2009PX-304Brian MurrayBrian MurrayEddy CueOn December 8, Mr. Cuereaches out to Mr. Murrayand Mr. Dohle to set up callsfor the following dayDecember 8, 2009PX-0314Apple Facilitates Publisher Communication“We should put a proposal together for Apple.... And also bring in RH if possible.”
  • 23. Apple Facilitates Publisher CommunicationOn December 10 at 9:52,Mr. Murray e-mailsMr. DohleDecember 10, 2009PX-0448Brian MurrayMarkus DohleOn December 10 at 9:47,Mr. Murray sends aninternal e-mail concerninghis call with Mr. CueDecember 10, 2009PX-304Brian MurrayBrian MurrayEddy CueOn December 8, Mr. Cuereaches out to Mr. Murrayand Mr. Dohle to set up callsfor the following dayDecember 8, 2009PX-0314
  • 24. On December 10 at 9:52,Mr. Murray e-mailsMr. DohleDecember 10, 2009PX-0448Brian MurrayMarkus DohleOn December 10 at 9:47,Mr. Murray sends aninternal e-mail concerninghis call with Mr. CueDecember 10, 2009PX-304Brian MurrayBrian MurrayEddy CueOn December 8, Mr. Cuereaches out to Mr. Murrayand Mr. Dohle to set up callsfor the following dayDecember 8, 2009PX-0314Apple Facilitates Publisher Communication“I was wondering if you had any time for aquick call tomorrow.”
  • 25. PX-0162“David Young…. Much happiercuz of meeting. Not spoil fun….Check in after. Dinner in Jan.Top Man talks differentlanguage. Not $9.95.”
  • 26. PX-0299“Email is cue@apple.com. I’ll send youhis phone number tomorrow.”David Young“David: do you have a phone number forEddie Cue…? He didn’t have a card when gotto me (we were last and he left here to go to theplane) – or even an email address? I want totake up your suggestion to email him about the‘term sheet’…”Carolyn Reidy
  • 27. Apple Provides Information to PublishersAbout Other PublishersPX-0359PX-0159
  • 28. PX-0036“Interested in agency model to fixAmazon pricing (we said no)”
  • 29. Apple & Publisher Conspiracy CommencesPX-0056PX-0501PX-0502Carolyn ReidyMarkus DohleJohn Sargent“I want to update you [on] all my findings and thoughts.I have some things I want to run by you. I only need 30 minutes.”
  • 30. Apple & Publisher Conspiracy CommencesDecember 2110:33 a.m.PX-0788Carolyn ReidyEddy CueSpeak for10 minutes and45 secondsDecember 2112:17 p.m.PX-0788Eddy CueSpeak for17 minutes and37 secondsMarkus DohleDecember 2112:48 p.m.PX-0788Eddy CueSpeak for11 minutesJohn Sargent
  • 31. PX-0043“They saw both the plus (solvesAmazon issue) and negative(little less than they would like).”
  • 32. “It is important to Apple that there be‘some level of reasonable pricing.’Theyfeel the only way to get this is for theindustry to go to the agency model....”PX-0540“We would have to ‘get everyone else togo to the agency model.’”“Therefore they feel that new releaseeBooks should be priced at $12.99….”
  • 33. PX-0540“When they thought it through, theydidn’t think anything else wouldkeep the market from its currentpricing ‘craziness.’”
  • 34. PX-0336“He also thinks that book pricesare becoming too low – he isworried about the consumerperception. Therefore hesuggests an ‘agency model’....”
  • 35. PX-0336“I also indicated that Amazon wouldnot accept a distributor model. Heanswered that windowing could beused to establish a distributor modelon print pub date for ebooks (comingback to simultaneous publication).”
  • 36. PX-0317“Agency is anti-price war territory.”
  • 37. Publishers Attempt to Force Amazon off $9.99Establishes digital list priceequal to print list price andsells book to retailer forpercentage of digital listprice (usually 50%)PublisherEstablishesretail price forconsumerRetailerPaysretail priceConsumerEXAMPLE EXAMPLEEXAMPLE$28 list price, $28 digital priceWholesale price soldto the retailer$14.00 $9.99$9.99
  • 38. An Agency Model AllowsPublishers to Control Retail PriceEstablishesretail pricePublisher RetailerPaysretail priceConsumer$9.99EXAMPLE$9.99EXAMPLE$9.99EXAMPLESells to consumerat retail price
  • 39. Publishers Earn LessUnder an Agency ModelEstablishesretail pricePublisherSells to consumerat retail priceRetailerPaysretail priceConsumer$9.99EXAMPLE$9.99EXAMPLEPublisher receives 70% beforeauthor royalties$7.00$7.00$9.99EXAMPLE
  • 40. Publishers Can Raise Retail PricesUnder an Agency ModelEstablishesretail pricePublisher RetailerPaysretail priceConsumer$14.99EXAMPLE$14.99EXAMPLEEXAMPLE$14.99Sells to consumerat retail price
  • 41. Publishers Can Raise Retail PricesUnder an Agency ModelEstablishesretail pricePublisher RetailerPaysretail priceConsumer$14.99EXAMPLE$14.99EXAMPLEPublisher receives 70% beforeauthor royalties$7.00$10.50EXAMPLE$14.99Sells to consumerat retail price
  • 42. January 4, 2010Carolyn ReidyEddy CueE-mail from: To:Apple’s and Publishers’ Goals Align“As we discussed, here iswhat I think is the bestapproach for ebooks.”
  • 43. January 4, 2010Eddy CueE-mail from: To:Markus DohleApple’s and Publishers’ Goals Align“As we discussed, here iswhat I think is the bestapproach for ebooks.”
  • 44. January 4, 2010Eddy CueE-mail from: To:John SargentApple’s and Publishers’ Goals Align“As we discussed, here iswhat I think is the bestapproach for ebooks.”
  • 45. January 4, 2010Eddy CueE-mail from: To:David YoungApple’s and Publishers’ Goals Align“After talking to all theother publishers and seeingthe overall bookenvironment, here is what Ithink is the best approachfor ebooks.”
  • 46. January 5, 2010Eddy CueE-mail from: To:David ShanksApple’s and Publishers’ Goals Align“After talking to all theother publishers and seeingthe overall bookenvironment, here is what Ithink is the best approachfor ebooks.”
  • 47. January 5, 2010Eddy CueE-mail from: To:Brian MurrayApple’s and Publishers’ Goals Align“After talking to all theother publishers and seeingthe overall bookenvironment, here is what Ithink is the best approachfor ebooks.”
  • 48. Apple Acts to Facilitate ConspiracyPX-0021, PX-0473, PX-0476, PX-0041, PX-0040, PX-0306“[A]ll resellers of new titles need tobe in agency model….”
  • 49. January 11, 2010: Identical Draft AgreementsSent to PublishersPX-0248, PX-0249, PX-0285, PX-0286, PX-0322“Please find attached Apple’s proposedeBook Distribution deal for your review.”
  • 50. PX-0341“In order to not be in a situationwhereby we must price our adult newrelease eBooks sold through Apple at$9.99, undercutting one of the reasonsfor making the deal, we need to changeour eBook selling terms with our othereRetailers before that date.”
  • 51. Apple’s MFN Compels Publishers toMove All Retailers to AgencyEstablishes retail pricePublisherPublisher receives 70% beforeauthor royaltiesConsumerAmazon ConsumerApple$12.99Sells to consumerat retail price$9.99Establishes retail price$9.10$12.99$12.99$9.99
  • 52. Apple’s MFN Compels Publishers toMove All Retailers to AgencyEstablishes retail pricePublisherPublisher receives 70% beforeauthor royaltiesConsumerAmazon ConsumerApple$9.99Has pricing MFN; lowersprice to match Amazon$9.99$9.99$12.99 $12.99 $9.99$7.00$9.10Establishes retail price
  • 53. PX-0065“I feel like it’s a giant win to keeppushing the MFN and forcing peopleoff the amazon model and onto ours.”“The interesting insight in the meetingwas Eddy’s explanation that it doesn’thave to be that broad – any decentMFN forces the model.”
  • 54. PX-0540“We would have to ‘get everyoneelse to go to the agency model.’When I said, ‘but of course we can’ttalk to our competitors,’ he said hedidn’t mean other publishers, butour accounts – to which I replied, ifwe make these our terms, then theyare our terms.”
  • 55. PX-0026“The response from both Penguin andHachette was very similar –• willing to do an agency model• go agency model for new releaseswith everyone else”
  • 56. PX-0058“We have reviewed all the books onAmazon and they have switched toagency with the publishers.”
  • 57. PX-0055“I can live with this, as long asthey move Amazon to the agentmodel too for new releases for thefirst year. If they don’t, I’m notsure we can be competitive…”
  • 58. Publishers Recognize MFN Forces Them to AgencyRuss GrandinettiMeetingPX-0482John SargentJanuary 20, 2010
  • 59. January 20, 2010Russ GrandinettiMeetingPX-0482John SargentPublishers Recognize MFN Forces Them to AgencyPX-0482“Jan 20th: Russ met with John Sargent in NY. Johnindicated that he was working on an agency modelbut his plan was to offer both an agency andreseller model.”
  • 60. Publishers Recognize MFN Forces Them to AgencyEddy CuePX-0037, PX-0712John SargentDinnerJanuary 20, 2010Russ GrandinettiMeetingPX-0482John Sargent
  • 61. Apple Insists Macmillan Go to Agency with EveryoneEddy CuePX-0037John SargentE-MailJanuary 21, 2010Eddy CuePX-0037, PX-0712John SargentDinnerJanuary 20, 2010Russ GrandinettiMeetingPX-0482John Sargent
  • 62. Eddy CuePX-0037John SargentE-MailJanuary 21, 2010Eddy CuePX-0037, PX-0712John SargentDinnerJanuary 20, 2010Russ GrandinettiMeetingPX-0482John SargentApple Insists Macmillan Go to Agency with EveryonePX-0037“I am willing to give up on many…points…. Thestumbling block is the single large issue that weclearly had a misunderstanding about.”John SargentDinner“I understand. I don’t believe we are askingyou to do anything, you haven’t told us you aredoing. We are just trying to get a commitment.”Eddy Cue
  • 63. Apple Insists Macmillan Go to Agency with EveryoneRuss GrandinettiPhone CallPX-0482John SargentJanuary 21, 2010Eddy CuePX-0037John SargentE-MailEddy CuePX-0037, PX-0712John SargentDinnerJanuary 20, 2010Russ GrandinettiMeetingPX-0482John Sargent
  • 64. Russ GrandinettiPhone CallPX-0482John SargentJanuary 21, 2010Eddy CuePX-0037John SargentE-MailEddy CuePX-0037, PX-0712John SargentDinnerJanuary 20, 2010Russ GrandinettiMeetingPX-0482John SargentApple MFN RequiresMacmillan to Move Amazon to AgencyPX-0482“Jan 21st: John and Russ by phone. John realizedthat the Apple contract required him to only offerthe agency model only and wanted to talk throughoptions with Russ.”
  • 65. Apple Enlists Publishers to Convince Other PublishersBrian MurrayEddy CueE-mail from HarperCollinsCEO Brian Murray toMr. Cue indicating that hecannot do the deal withthe pricing MFN3:07 p.m.PX-0310
  • 66. Apple Enlists Publishers to Convince Other PublishersEddy CueCue calledMacmillanCEO Sargentfor approximately 2minutes3:47 p.m.PX-0788John SargentSargent calledMurray forapproximately8 minutes4:01 p.m.PX-0788Brian MurrayJohn SargentPX-0005HarperCollinsultimately agreed tothe MFN and signedthe Apple AgencyAgreement onJanuary 26Brian MurrayEddy CueSpoke on thephone forapproximately 11minutes3:34 p.m.PX-07882 Min11 Min 11 Min2 Min 8 Min
  • 67. Phone Calls Between Publisher Defendant CEOsin December and JanuaryBrian MurrayDavid ShanksJohn SargentCarolyn ReidyDavid Young
  • 68. Calls Between Publisher Defendant CEOsfrom December 1, 2009 to January 31, 2010NumberofCallsDecember 2009 January 2010Dec. 8, 2009Apple beginsreaching out topublishers(PX-0314)Dec. 15, 2009Apple holds initialmeeting with BigSix publishers(PX-0262)Jan. 11, 2010Apple sends draftcontracts to eachpublisher(PX-0248; PX-0249; PX-0285; PX-0322; PX-0286)Jan. 26, 2010All five publisherdefendants havesigned theagreement(PX-0005)Jan. 4-5, 2010Apple sends identicale-mails to publishersproposing key terms(PX-0021; PX-0473, PX-0476, PX-0041; PX-0040; PX-0306)Jan. 21-22, 2010Apple’s deadlinesfor publishers tocommit to the deal(PX-0707;PX-0042)
  • 69. PX-0020“Hey, do you have any more in, or still at 3?”John Sargent“give me a call on my cell (408-309-9215).”Eddy Cue
  • 70. PX-0029“My orders from London. You must have thefourth major or we can’t be in theannouncement.”“Hopefully this is not an issue but if it is I willcall you at 4pm. It would be a huge mistake tomiss this if we have 3.”Eddy CueDavid Shanks
  • 71. PX-0718“PenguinNo change here, he is waiting for theothers to sign. We have executablesready to sign but he wants anassurance that he is 1 of 4 beforesigning (not in the contract).”
  • 72. DX-239“PenguinOnce previous two are signed, Iwill head to their offices to get thisone signed.”
  • 73. PX-0032“Throw in with Apple and see ifwe can all make a go of this tocreate a real mainstream ebooksmarket at $12.99 and $14.99.”
  • 74. iPad Launches with Best-Selling e-Books at $14.99
  • 75. Amazon Prices Its Best Sellers at $9.99
  • 76. PX-0607“I cannot believe that Jobs made the statement below. Incredibly stupid.”“Mossberg wondered why someone ‘should buy a [b]book for $14.99 whenyou can buy one from Amazon for $9.99 on the Kindle or Barnes & Noble?’Aconfident Jobs replies, ‘That won’t be the case.... The prices will be the same.’”
  • 77. PX-0053Hi Eddy. I am gonna need to figure out our finalagency terms of sale tonight. Can you call me please?John Sargent“I just tried. Call me on my cell 408-309-9215.”Eddy CueSubject: Re: URGENT!!
  • 78. PX-0514“But we also asked for aguarantee that if anybody else isselling the books cheaper than weare, then we can sell them at thelower price too. So they went toAmazon and said, ‘Youre goingto sign an agency contract orwe’re not going to give you thebooks.’”
  • 79. PX-0284“Great news and congratulations!!!”Eddy Cue“I wanted to tell you before you read iton line that we have finally reached anagreement with Amazon on our newterms of sale….The playing field is nowlevel.”* * *“Please keep this to yourself until theannouncement.”David Shanks
  • 80. DX-434
  • 81. PX-0542“The other point that came out of the conversation was Heather’s view that Indigoand the major publishers all have a massive stake in ensuring that the success ofthe physical book as a format continues (they are not making money out of ebooksales in the present price wars with Amazon) and that she would welcome acombined meeting on how we might achieve this in Canada.”8.84"“We would never meet with Barnes and all ourcompetitors. The Government would be all over that. Wewould meet separately with Indigo being the facilitatorand go between. That is how we worked with Apple andthe government is still looking into that.”David Shanks