Apple ebook trial opinion

7/28/2019 Apple ebook trial opinion

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UNI TED STATES DI STRI CT COURTSOUTHERN DI STRI CT OF NEW YORK- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

UNI TED STATES OF AMERI CA,

Pl ai nt i f f ,- v-

APPLE I NC. , et al . ,

Def endants.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

THE STATE OF TEXAS, et al . ,

Pl ai nt i f f s,- v-

PENQUI N GROUP ( USA) I NC. , et al . ,

Def endants.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

X::

::::::::X::::::::::X

12 Ci v. 2826 ( DLC)

OPI NI ON & ORDER

12 Ci v. 3394 ( DLC)

APPEARANCES:

For pl ai nt i f f t he Uni t ed St at es:

Mar k W. RyanLawr ence E. But er manDani el McCuai gSt ephen T. Fai r chi l dNathan P. Sut t onCar r i e SymeBi l l J onesUni t ed St at es Depar t ment of J ust i ceAnt i t r ust Di vi s i on

450 Fi f t h St r eet , N. W. , Sui t e 4000Washi ngt on, DC 20530


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Tabl e of Cont ents

PROCEDURAL HI STORY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5SUMMARY OF FI NDI NGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

A. Devel opment of t he E- book Mar ket . . . . . . . . . . . . . . . . . . . . 14B. Publ i sher s Di scont ent wi t h t he $9. 99 Pr i ce Poi nt . . . 15C. J anuar y 2009- December 2009: Publ i sher Def endant sPur sue St r at egi es t o Combat Amazon Pr i ci ng . . . . . . . . . . . . . . . 16D. Appl e s Devel opment of i Books . . . . . . . . . . . . . . . . . . . . . . . 26E. December 15 t o 16, 2009: Appl e s Fi r st New Yor kMeet i ngs wi t h Publ i sher s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30F. Appl e Swi t ches Gears and Present s An Agency Modelwi t h 30% Commi ssi on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37G. Appl e s Ter m Sheet : Al l E- t ai l er s t o Agency andPr i ci ng Caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45H. Cr eat i on of t he MFN Cl ause . . . . . . . . . . . . . . . . . . . . . . . . . . 47I . J anuar y 11: Appl e Di st r i but es Dr af t Agency Agreements 50

1. MFN Negot i at i ons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522. 30 Per cent Commi ssi on Negot i at i ons . . . . . . . . . . . . . . . . . 583. Pr i ce Ti er Negot i at i ons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

J . J anuar y 18- 27: Publ i shers I ni t i at e AgencyNegot i at i ons wi t h Amazon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66K. J anuar y 21- 26: Execut i on of Agr eements . . . . . . . . . . . . . 73L. J anuar y 27: The Launch of t he i Pad and i Bookst or e . . 85M. J anuar y 28 t o 31: The Publ i sher Def endant s For ceAmazon t o Adopt t he Agency Di st r i but i on Model . . . . . . . . . . . . 86N. The Fi ve Amazon Agency Agreement s . . . . . . . . . . . . . . . . . . . 90O. Pr i ces af t er Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94P. Random House Adopt s an Agency Model . . . . . . . . . . . . . . . . . 99Q. The Publ i sher Def endant s Requi r e Googl e t o Adopt anAgency Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101R. Concl udi ng Obser vat i ons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

DI SCUSSI ON. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104A. Legal St andar d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104B. Anal ysi s of t he Evi dence . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

APPLE S ARGUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122A. The Monsant o Deci si on and Appl e s I ndependent Busi nessI nt er est s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

B. Appl e s I nt ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135C. Wi ndowi ng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140D. Character i zat i on of the Evi dence . . . . . . . . . . . . . . . . . . . 142

1. I ni t i al Meet i ngs wi t h t he Publ i shers . . . . . . . . . . . . . . 1442. Conspi r acy by Tel epat hy . . . . . . . . . . . . . . . . . . . . . . . . . . . 1463. St eve J obs s St at ement s . . . . . . . . . . . . . . . . . . . . . . . . . . . 1494. The Publ i shers Rai sed Pr i ces, Not Appl e . . . . . . . . . . . 150


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E. Per Se Li abi l i t y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152F. Avoi di ng a Dangerous Precedent . . . . . . . . . . . . . . . . . . . . . 155

CONCLUSI ON. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

DENI SE COTE, Di st r i ct J udge:Thi s Opi ni on expl ai ns how and why t he pr i ces f or many

el ect r oni c books, or e- books, r ose si gni f i cant l y i n t he Uni t ed

St at es i n Apr i l 2010. Pl ai nt i f f s t he Uni t ed St at es of Amer i ca

( DOJ ) and t hi r t y- t hr ee st at es and U. S. t er r i t or i es ( t he

St at es) ( col l ect i vel y, Pl ai nt i f f s) , f i l ed t hese ant i t r ust

sui t s on Apr i l 11, 2012, al l egi ng t hat def endant Appl e I nc.

( Appl e) and f i ve book publ i shi ng compani es conspi r ed t o r ai se,

f i x, and st abi l i ze t he r et ai l pr i ce f or newl y r el eased and

best sel l i ng t r ade e- books i n vi ol at i on of Sect i on 1 of t he

Sher man Ant i t r ust Act , 15 U. S. C. 1 ( Sherman Act ) , and

var i ous st at e l aws. These cases repr esent t wo of f our r el at ed

act i ons brought bef or e t hi s Cour t al l egi ng t he same e- books

pr i ce- f i xi ng conspi r acy bet ween Appl e and t he publ i sher s. 1

1 The ot her t wo cases ar e St at e of Texas, et al . v. Hachet t e BookGr oup, I nc. , et al . , 12 Ci v. 6625 ( DLC) , i n whi ch f or t y- ni ne

st at es, t he Di st r i ct of Col umbi a, and t he U. S. Ter r i t or i es andPossessi ons t he Vi r gi n I sl ands, Puer t o Ri co, t he Nor t her nMar i ana I sl ands, Guam, and Amer i can Samoa, br i ngi ng cl ai ms aspar ens pat r i ae, have set t l ed t hei r cl ai ms agai nst Hachet t e,Har per Col l i ns, and Si mon & Schust er ( Set t l ement Act i on) ; andI n r e: El ect r oni c Books Ant i t r ust Li t i gat i on, 11 MD 2296 ( DLC) ,i n whi ch cl ass act i on pl ai nt i f f s br i ng cl ai ms f or damages( Cl ass Act i on) .

The

publ i sher s are Hachet t e Book Gr oup, I nc. ( Hachet t e) ,

Har per Col l i ns Publ i sher s LLC ( Har per Col l i ns) , Hol t zbr i nck


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Publ i sher s LLC d/ b/ a Macmi l l an ( Macmi l l an) , Pengui n Gr oup

( USA) , I nc. ( Pengui n) , and Si mon & Schust er , I nc. ( Si mon &

Schust er or S&S) ( col l ect i vel y, Publ i sher Def endant s) .

Onl y Appl e pr oceeded t o t r i al ; t he Publ i sher Def endant s

have set t l ed t hei r cl ai ms wi t h bot h t he DOJ and t he St at es.

Thi s Opi ni on present s t he Cour t s f i ndi ngs of f act and

concl usi ons of l aw f ol l owi ng t he bench t r i al t hat was hel d f r om

J une 3 t o 20, 2013 t o r esol ve t he i ssue of Appl e s l i abi l i t y and

t he scope of any i nj unct i ve r el i ef . As descr i bed bel ow, t he

Pl ai nt i f f s have shown t hat Appl e conspi r ed t o r ai se t he r et ai l

pr i ce of e- books and t hat t hey ar e ent i t l ed t o i nj unct i ve

r el i ef . A t r i al on damages wi l l f ol l ow.

PROCEDURAL HI STORY

Fact and exper t di scover y i n these act i ons concl uded on

Mar ch 22, 2013. The par t i es J oi nt Pr et r i al Or der , pr oposed

f i ndi ngs of f act and concl usi ons of l aw, and pr et r i al memor anda

wer e submi t t ed on Apr i l 26 and, f ol l owi ng rul i ngs on r edact i ons,

were f i l ed on May 14.

At t he t i me t he t r i al was schedul ed, t he par t i es agr eed

t hat a bench t r i al woul d r esol ve cl ai ms f or l i abi l i t y and

i nj uncti ve r el i ef . Wi t h t he par t i es consent , t he t r i al was

conduct ed i n accor dance wi t h t he Cour t s cust omar y pr act i ces f or

non- j ur y pr oceedi ngs, whi ch i ncl udes t aki ng di r ect t est i mony


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f r om wi t nesses under a par t y s cont r ol t hr ough af f i davi t s

submi t t ed wi t h t he pr et r i al or der . The par t i es al so ser ved wi t h

t he J oi nt Pr et r i al Or der copi es of al l exhi bi t s and deposi t i on

t est i mony t hat t hey i nt ended t o of f er as evi dence i n chi ef at

t r i al . 2

At t r i al , t he Pl ai nt i f f s cal l ed t wel ve f act wi t nesses and

t wo exper t economi st s. The Pl ai nt i f f s f act wi t nesses i ncl uded

t hr ee Appl e empl oyees: Eddy Cue ( Cue) , Seni or Vi ce Pr esi dent

of I nt er net Sof t war e and Ser vi ces at Appl e; Kei t h Moer er

( Moer er ) , a Di r ect or of i Tunes at Appl e; and Kevi n Saul

( Saul ) , Associ at e Gener al Counsel at Appl e, and t he l ead

busi ness l awyer suppor t i ng Appl e s I nt er net and Sof t war e

Ser vi ces di vi si on. The Pl ai nt i f f s al so cal l ed seni or execut i ves

f r om each of t he f i ve Publ i sher Def endant s: Davi d Shanks

( Shanks) , CEO of Pengui n; Car ol yn Rei dy ( Rei dy) , Pr esi dent

2 The Cour t s procedur es f or non- j ur y pr oceedi ngs wer e di scussedi n det ai l at conf er ences hel d on J une 22 and Oct ober 26, 2012,and May 8, 2013. As t he part i es wer e i nf ormed, t he Cour tpr epar ed a dr af t opi ni on i n advance of t he bench t r i al based ont he wi t ness af f i davi t s and ot her document s submi t t ed wi t h t hepr et r i al or der and t he ar gument s of counsel i n t hei r t r i almemor anda. At t r i al , t he af f i ant s swor e t o t he t r ut h of t hecont ent s of t hei r af f i davi t s and wer e t ender ed f or cr oss and

r edi r ect exami nat i on, and t he ot her t r i al evi dence was f or mal l yr ecei ved. The par t i es under st ood t hat t he Cour t s f i nalf i ndi ngs of f act and concl usi ons of l aw woul d i ncor por at e al l oft hi s evi dence. Consi st ent wi t h t hese pr ocedur es, and wi t h t heexpect at i on t hat t he Cour t had al r eady pr epar ed a dr af t opi ni on,t he par t i es j oi nt l y asked t he Cour t f or i t s pr el i mi nar y vi ews ont he mer i t s at t he f i nal pr et r i al conf er ence hel d on May 23,2013.


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and CEO of Si mon & Schust er ; Br i an Murr ay ( Murr ay) , CEO of

Har per Col l i ns; J ohn Sar gent ( Sar gent ) , CEO of Macmi l l an; and

Davi d Young ( Young) , Chai r man and CEO of Hachet t e f r om 2006

t hr ough March 2013, who cur r ent l y serves as Chai r man of t he

Boar d of Di r ect or s of Hachet t e. The Pl ai nt i f f s cal l ed f our

addi t i onal f act wi t nesses: Russel l Gr andi net t i ( Gr andi net t i ) ,

Vi ce Pr esi dent - - Ki ndl e at non- par t y Amazon. com ( Amazon) ;

Davi d Naggar ( Naggar ) , Vi ce Pr esi dent of Ki ndl e Cont ent at

Amazon; Laur a Porco ( Por co) , Amazon s Di r ect or of Ki ndl e Books

f r om 2006 t o 2011; and Thomas Tur vey ( Tur vey) , Di r ect or of

St r at egi c Par t ner shi ps at non- par t y Googl e I nc. ( Googl e) . The

Pl ai nt i f f s exper t wi t nesses wer e Dr . Ri char d Gi l ber t

( Gi l ber t ) , Emer i t us Pr of essor of Economi cs and Pr of essor of

t he Gr aduat e School at t he Uni ver si t y of Cal i f or ni a, Ber kel ey,

and a Seni or Consul t ant ( Af f i l i at e) at Compass Lexecon, an

economi c consul t i ng f i r m; and Dr . Or l ey Ashenf el t er

( Ashenf el t er ) , t he J oseph Dougl as Gr een 1895 Pr of essor of

Economi cs at Pr i ncet on Uni ver si t y.

Af f i davi t s submi t t ed by t he Pl ai nt i f f s const i t ut ed t he

di r ect t est i mony of f our of t hei r f act wi t nesses - - Gr andi net t i ,

Naggar , Por co, and Tur vey - and bot h of t hei r exper t wi t nesses.

Appl e had i nt ended t o cal l seven of Pl ai nt i f f s wi t nesses i n i t s

own case - - Cue, Moer er , Mur r ay, Rei dy, Sargent , Saul , and

Young. Thus, t hese wi t nesses af f i davi t s wer e al so r ecei ved


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dur i ng t he Pl ai nt i f f s case i n chi ef . The Pl ai nt i f f s subpoenaed

Shanks t o t est i f y at t r i al . 3

The Pl ai nt i f f s al so of f er ed excer pt s f r om t he deposi t i ons

of J ohn Maki nson ( Maki nson) , Chai r man and CEO of t he Pengui n

Gr oup, t he parent company of Pengui n; Ar naud Nour r y ( Nour r y) ,

Chai r man and CEO of Hachet t e Li vr e, t he par ent company of

Hachet t e; and Maj a Thomas ( Thomas) , Seni or Vi ce- Presi dent at

Hachet t e. Appl e of f er ed count er - desi gnat i ons as t o Nour r y and

Thomas.

Each of t hese wi t nesses appear ed at

t r i al and was cross- exami ned.

Dur i ng t he pr esent at i on of i t s def ense, Appl e pr esent ed

af f i davi t s const i t ut i ng t he di r ect t est i mony of t hr ee f act

wi t nesses and t hr ee exper t economi st s. Appl e s f act wi t nesses

were Rober t McDonal d ( McDonal d) , t he manager of Appl e s U. S.

i Bookst or e; Ther esa Hor ner ( Hor ner ) , Vi ce Pr esi dent of Di gi t al

Cont ent f or Barnesandnobl e. com, a subsi di ary of non- part y Barnes

& Nobl e, I nc. ( Barnes & Nobl e) ; and Madel i ne McI nt osh

( McI nt osh) , Chi ef Oper at i ng Of f i cer of non- par t y Random House,

I nc. ( Random House) . Appl e s exper t wi t nesses wer e Dr .

Benj ami n Kl ei n ( Kl ei n) , Pr of essor Emer i t us of Economi cs at t he

Uni ver si t y of Cal i f or ni a, Los Angel es, Seni or Consul t ant at

3 Pengui n set t l ed t hese act i ons on t he eve of t r i al and t her ef or et he af f i davi t const i t ut i ng t he di r ect t est i mony of Shanks, whi chhad been submi t t ed wi t h t he J oi nt Pr et r i al Or der , was notof f ered at t r i al .


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Compass Lexecon, and Presi dent of EAC Associ ates, I nc. ; Dr .

Mi chel l e Bur t i s ( Bur t i s) , Ph. D. , Seni or Advi sor at Cor ner st one

Resear ch, I nc. , an economi c and f i nanci al consul t i ng f i r m; and

Dr . Kevi n Mur phy ( Mur phy) , Geor ge J . St i gl er Di st i ngui shed

Ser vi ce Pr of essor of Economi cs at t he Uni ver si t y of Chi cago, and

Facul t y Resear ch Associ at e at t he Nat i onal Bur eau of Economi c

Resear ch. Each of t hese wi t nesses, except McI nt osh, appeared at

t r i al and was cr oss- exami ned. The Pl ai nt i f f s di d not seek t o

cr oss- exami ne McI nt osh.

As not ed, t he bench t r i al was hel d f r om J une 3 t o J une 20,

2013, and t hi s Opi ni on pr esent s t he Cour t s f i ndi ngs of f act and

concl usi ons of l aw. The f i ndi ngs of f act appear pr i nci pal l y i n

t he f ol l owi ng Backgr ound sect i on, but al so appear i n t he

r emai ni ng sect i ons of t he Opi ni on.

SUMMARY OF FI NDI NGS

The Pl ai nt i f f s have shown t hat t he Publ i sher Def endant s

conspi r ed wi t h each ot her t o el i mi nat e r et ai l pr i ce compet i t i on

i n or der t o r ai se e- book pr i ces, and t hat Appl e pl ayed a cent r al

r ol e i n f aci l i t at i ng and execut i ng t hat conspi r acy. Wi t hout

Appl e s or chest r at i on of t hi s conspi r acy, i t woul d not have

succeeded as i t di d i n t he Spr i ng of 2010.

There i s, at t he end of t he day, ver y l i t t l e di sput e about

many of t he most mat er i al f act s i n t hi s case. Bef or e Appl e even


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met wi t h t he f i r st Publ i sher Def endant i n mi d- December 2009, i t

knew t hat t he Bi g Si x of Uni t ed St at es publ i shi ng - t he

Publ i sher Def endant s and Random House ( col l ect i vel y, t he

Publ i sher s) - - want ed t o r ai se e- book pr i ces, i n par t i cul ar

above t he $9. 99 prevai l i ng pr i ce charged by Amazon f or many e-

book ver si ons of New Yor k Ti mes best sel l i ng books ( NYT

Best sel l er s) and ot her newl y r el eased har dcover books ( New

Rel eases) . Appl e al so knew t hat Publ i sher Def endant s wer e

al r eady act i ng col l ect i vel y t o pl ace pr essur e on Amazon t o

abandon i t s pr i ci ng st r at egy.

At t hei r ver y f i r st meet i ngs i n mi d- December 2009, t he

Publ i sher s conveyed to Appl e t hei r abhorr ence of Amazon s

pr i ci ng, and Appl e assur ed t he Publ i sher s i t was wi l l i ng t o wor k

wi t h t hem t o rai se t hose pr i ces, suggest i ng pr i ces such as

$12. 99 and $14. 99. Over t he cour se of t hei r negot i at i ons i n

December 2009 and J anuar y 2010, Appl e and t he Publ i sher

Def endant s educat ed one anot her about t hei r ot her pr i or i t i es.

Appl e st r ongl y hoped t o announce i t s new i Bookst ore when i t

l aunched t he i Pad on J anuary 27, 2010, but woul d onl y do so i f

i t had agr eement s i n pl ace wi t h a cor e gr oup of Publ i sher s by

t hat dat e, coul d assur e i t sel f i t woul d make a pr of i t i n t he

i Bookst or e, and coul d of f er e- book t i t l es si mul t aneousl y wi t h

t hei r har dcover r el eases. For t hei r par t , i f t he Publ i sher

Def endant s wer e goi ng to t ake cont r ol of e- book pr i ci ng and move


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t he pr i ce poi nt above $9. 99, t hey needed t o act col l ect i vel y;

any ot her cour se woul d l eave an i ndi vi dual Publ i sher vul ner abl e

t o r et al i at i on f r om Amazon.

Appl e and t he Publ i sher Def endant s shar ed one over archi ng

i nt er est - - t hat t her e be no pr i ce compet i t i on at t he r et ai l

l evel . Appl e di d not want t o compete wi t h Amazon ( or any ot her

e- book ret ai l er ) on pr i ce; and t he Publ i sher Def endant s want ed

t o end Amazon s $9. 99 pr i ci ng and i ncr ease si gni f i cant l y t he

pr evai l i ng pr i ce poi nt f or e- books. Wi t h a f ul l appr eci at i on of

each ot her s i nt er est s, Appl e and t he Publ i sher Def endant s

agr eed t o wor k t oget her t o el i mi nat e r et ai l pr i ce compet i t i on i n

t he e- book market and rai se t he pr i ce of e- books above $9. 99.

Appl e sei zed t he moment and br i l l i ant l y pl ayed i t s hand.

Taki ng advant age of t he Publ i sher Def endant s f ear of and

f r ust r at i on over Amazon s pr i ci ng, as wel l as t he t i ght wi ndow

of oppor t uni t y created by t he i mpendi ng l aunch of t he i Pad on

J anuar y 27 ( t he Launch) , Appl e garnered t he si gnat ures i t

needed t o i nt r oduce t he i Bookst or e at t he Launch. I t pr ovi ded

t he Publ i sher Def endant s wi t h t he vi si on, t he f or mat , t he

t i met abl e, and t he coor di nat i on t hat t hey needed t o r ai se e- book

pr i ces. Appl e deci ded t o of f er t he Publ i sher Def endant s the

opport uni t y t o move f r om a whol esal e model - - wher e a publ i sher

r ecei ves i t s desi gnat ed whol esal e pr i ce f or each e- book and t he

r et ai l er set s t he r et ai l pr i ce - - t o an agency model , wher e a


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publ i sher set s t he r et ai l pr i ce and t he r et ai l er sel l s t he

e- book as i t s agent .

The agency agreement s t hat Appl e and t he Publ i sher

Def endants execut ed on t he eve of t he Launch di vi ded New Rel ease

e- books among pr i ce t i er s. The t op of each t i er , or cap, was

essent i al l y t he new pr i ce f or New Rel ease e- books. The caps

i ncl uded $12. 99 and $14. 99 f or many books t hen bei ng sol d at

$9. 99 by Amazon.

The agreements al so i ncl uded a pr i ce par i t y provi si on, or

Most - Favor ed- Nat i on cl ause ( MFN) , whi ch not onl y pr ot ect ed

Appl e by guar ant eei ng i t coul d mat ch t he l owest r et ai l pr i ce

l i st ed on any compet i t or s e- bookst or e, but al so i mposed a

sever e f i nanci al penal t y upon t he Publ i sher Def endant s i f t hey

di d not f or ce Amazon and ot her r et ai l er s si mi l ar l y t o change

t hei r busi ness model s and cede cont r ol over e- book pr i ci ng t o

t he Publ i sher s. As Appl e made cl ear t o t he Publ i sher s, Ther e

i s no one out si de of us t hat can do t hi s f or you. I f we mi ss

t hi s oppor t uni t y, i t wi l l l i kel y never come agai n.

Through t he vehi cl e of t he Appl e agency agreements, t he

pr i ces i n t he nascent e- book i ndust r y shi f t ed upwar d, i n some

cases 50% or mor e f or an i ndi vi dual t i t l e. Vi r t ual l y over ni ght ,

Appl e got an at t r act i ve, addi t i onal f eat ur e f or i t s i Pad and a

guarant eed new r evenue st r eam, and t he Publ i sher Def endants

r emoved Amazon s abi l i t y t o pr i ce t hei r e- books at $9. 99. A


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det ai l ed expl anat i on of how Appl e f aci l i t at ed t hi s conspi r acy

and changed the f ace of t he e- book i ndust r y f ol l ows.

BACKGROUND

Def endant Appl e engages i n a number of busi nesses, but as

r el evant her e i t sel l s t he i Pad t abl et devi ce and di st r i but es

e- books t hr ough i t s i Bookst or e. E- books ar e books t hat ar e sol d

t o consumers i n el ect r oni c f orm, and t hat can and must be r ead

on a dedi cat ed el ect r oni c devi ce such as t he i Pad, t he Bar nes &

Nobl e Nook, or Amazon s Ki ndl e. The Publ i sher Def endant s

publ i sh bot h e- books and pr i nt books. The f i ve Publ i sher

Def endant s and Random House repr esent t he si x l argest publ i sher s

of t r ade books i n t he Uni t ed St at es. 4 These si x f i r ms ar e

of t en r ef er r ed t o wi t hi n t he publ i shi ng i ndust r y as t he Bi g

Si x. 5

The Publ i sher Def endant s sol d over 48% of al l e- books i n

t he Uni t ed St at es i n t he f i r st quar t er of 2010.

4 Tr ade books consi st of gener al i nt er est f i ct i on and non- f i ct i onbooks. They ar e t o be di st i ngui shed f r om non- t r ade books such

as academi c t extbooks, r ef er ence mat er i al s, and ot her t ext s.5 Ti t l es f r om t he Bi x Si x publ i sher s account ed f or over 90% ofal l U. S. NYT Best sel l er book sal es i n 2010. Random House i s thel ar gest of t he Bi g Si x, f ol l owed, i n descendi ng or der of si ze,by Pengui n, Si mon & Schust er , Har per Col l i ns, Hachet t e, andMacmi l l an. When i t comes t o e- books, t he l ar gest of t he Bi g Si xi n ear l y 2010 was Pengui n, f ol l owed i n descendi ng order byRandom House, Harper Col l i ns, Hachet t e, S&S, and Macmi l l an.


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A. Devel opment of t he E- book Mar ketAmazon s Ki ndl e was t he f i r st e- r eader t o gai n wi despr ead

commerci al accept ance. When t he Ki ndl e was l aunched i n 2007,

Amazon qui ckl y became t he market l eader i n t he sal e of e- books

and e- book r eaders. 6 Through 2009, Amazon domi nat ed the e- book

r et ai l mar ket , sel l i ng near l y 90% of al l e- books. 7

Amazon ut i l i zed a di scount pr i ci ng st r at egy t hr ough whi ch

i t char ged $9. 99 f or cer t ai n New Rel ease and best sel l i ng

e- books. Amazon was st aunchl y commi t t ed t o i t s $9. 99 pr i ce

poi nt and bel i eved i t woul d have l ong- t er m benef i t s f or i t s

consumers. I n order t o compete wi t h Amazon, ot her e- book

r et ai l er s al so adopt ed a $9. 99 or l ower r et ai l pr i ce f or many

e- book t i t l es.

Pr i or t o Apr i l 2010, t he Publ i sher s di st r i but ed pr i nt and

di gi t al books t hr ough a whol esal e pr i ci ng model , i n whi ch a

cont ent pr ovi der set s a l i st pr i ce ( al so known as a suggest ed

r et ai l pr i ce) and t hen sel l s books and e- books t o a r et ai l er -

such as Amazon - - f or a whol esal e pr i ce, whi ch i s of t en a

per cent age of t he l i st pr i ce. The r et ai l er t hen of f er s t he book

and e- book t o consumer s at what ever pr i ce i t chooses. Pr i or t o

6 The Nook was r el eased two year s l at er , i n November of 2009,of f er i ng some compet i t i on t o Amazon. The i Pad was rel eased i nApr i l 2010.7 At pr esent , t he l ar gest U. S. r et ai l er s of t r ade e- books i ncl udeAppl e, and non- par t i es Amazon, Barnes & Nobl e, Googl e, KoboI nc. , and Sony Cor por at i on.


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2009, many publ i sher s set a whol esal e pr i ce f or e- books at a 20%

di scount f r om t he equi val ent physi cal book whol esal e pr i ce t o

r ef l ect t he many cost savi ngs associ at ed wi t h t he di st r i but i on

and sal e of e- books. For i nst ance, t her e i s no cost f or t he

pr i nt i ng, st or age, packagi ng, shi ppi ng, or r et ur n of e- books.

Wi t h a di gi t al book di scount , Amazon s $9. 99 pr i ce poi nt r oughl y

matched t he whol esal e pr i ce of many of i t s e- books.

B. Publ i sher s Di scont ent wi t h t he $9. 99 Pr i ce Poi ntThe Publ i shers wer e unhappy wi t h Amazon s $9. 99 pr i ce poi nt

and f eared t hat i t woul d have a number of per ni ci ous ef f ect s on

t hei r prof i t s, bot h i n t he shor t r un and l ong- t er m. I n t he

shor t - t er m, t he Publ i sher s bel i eved t he l ow pr i ce poi nt was

eat i ng i nt o sal es of t hei r mor e pr of i t abl e har dcover books,

whi ch wer e of t en pr i ced at t hi r t y dol l ar s or mor e, and

t hr eat eni ng t he vi abi l i t y of t he br i ck- and- mor t ar st or es i n

whi ch har dcover books were di spl ayed and sol d. Over t he l ong-

t erm, t hey f ear ed t hat consumers woul d gr ow accust omed t o

e- books pr i ced at $9. 99 and t hat t he $9. 99 pr i ce poi nt woul d

er ode pr i ces f or al l books, t her eby t hr eat eni ng t he busi ness

model f or t he publ i shi ng i ndust r y. They bel i eved t hat t hi s l ow

pr i ce f ai l ed t o r ef l ect t he t r ue val ue of many books and al so

f ai l ed t o di st i ngui sh among books i n t er ms of t he ef f or t

ent ai l ed t o cr eat e and pr oduce t hem and i n t er ms of t hei r

qual i t y, however one mi ght measur e qual i t y.


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The Publ i shers al so f eared Amazon s gr owi ng power i n t he

book di st r i but i on busi ness. They wer e concer ned t hat , shoul d

Amazon cont i nue t o domi nat e t he sal e of e- books t o consumers, i t

woul d st ar t t o demand even l ower whol esal e pr i ces f or e- books

and mi ght begi n t o compet e di r ect l y wi t h publ i sher s by

negot i at i ng di r ect l y wi t h aut hor s and l i t er ar y agent s f or r i ght s

- a pr ocess r ef er r ed t o as di si nt er medi at i on. 8

As a resul t , t he Publ i sher Def endant s det er mi ned t hat t hey

needed t o f orce Amazon t o abandon i t s di scount pr i ci ng model .

As Hachet t e s Young bl unt l y put i t , t hey had t o def ea[ t ]

[ Amazon s] $9. 99 pr i ci ng pol i cy, and pr event t he wr et ched

$9. 99 pr i ce poi nt becomi ng a de f acto st andard.

C. J anuar y 2009- December 2009: Publ i sher Def endant s PursueSt r at egi es t o Combat Amazon Pr i ci ng

Begi nni ng i n at l east ear l y 2009, t he Publ i sher Def endant s

began t est i ng di f f er ent ways t o addr ess what Macmi l l an t er med

book deval uat i on t o $9. 99, and t o conf r ont what S&S s Rei dy

descr i bed as t he basi c probl em: how t o get Amazon t o change i t s

pr i ci ng and move of f i t s $9. 99 pr i ce poi nt . They f r equent l y

coor di nat ed t hei r ef f or t s t o i ncr ease t he pr essure on Amazon and

decr ease t he l i kel i hood t hat Amazon woul d r et al i at e - - an

out come each Publ i sher Def endant f ear ed i f i t act ed al one.

8 I n f act , as descr i bed bel ow, Amazon announced a new i ni t i at i vei n J anuar y 2010 t hat woul d assi st aut hor s i n sel f - publ i shi ngt hr ough Amazon on t he Ki ndl e Di gi t al Pl at f orm.


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One of t he st r at egi es t hat t hey empl oyed was t he

el i mi nat i on of t he exi st i ng di scount on whol esal e pr i ces of

e- books. Thi s meant t hat t he whol esal e pr i ce f or e- books woul d

equal t he whol esal e pr i ce f or physi cal books, and as a resul t ,

t he whol esal e pr i ce t hat Amazon pai d f or an e- book woul d be set

at sever al dol l ar s above Amazon s $9. 99 pr i ce poi nt . Thi s

t act i c, however , f ai l ed t o convi nce Amazon t o change i t s pr i ci ng

pol i ci es and i t cont i nued t o sel l many NYT Best sel l er s as l oss

l eader s at $9. 99. 9

The Publ i shers wer e not shy about express i ng t hei r

di spl easur e t o Amazon about i t s $9. 99 pr i ci ng. I n Febr uar y

2009, Pengui n tol d Amazon t hat t hei r 9. 99 model was not a

good sust ai nabl e one. Har per Col l i ns si mi l ar l y war ned Amazon

t hat i t was ser i ousl y consi der i ng changes t o our di scount

str uct ur e and our di gi t al l i s t pr i ces f or al l r et ai l er s . I n

March 2009, Macmi l l an s Sargent met wi t h Amazon t o expr ess hi s

own concer n wi t h t he $9. 99 pr i ce poi nt , and i ndi cat ed t hat al l

t he pubs wer e t al ki ng about i t . I n J une 2009, S&S s Rei dy

bl unt l y t ol d Amazon t hat t he $9. 99 pr i ce poi nt was a mi st ake

and t hat she woul d cont i nue to be vocal because she thi nks i t s

t er r i bl e f or t he busi ness. I n ear l y December 2009, Hachet t e s

9 Among other st r at egi es t hat t wo or more of t he Publ i sher sdi scussed wi t h each ot her wer e ret ai l pr i ce mai nt enance,mandat ory mi ni mum adver t i sed pr i ci ng, and a j oi nt vent ur e t osel l e- books.


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Nour r y met wi t h Amazon s Naggar , and t ol d hi m t hat Amazon s

$9. 99 pr i ci ng posed a bi g pr obl em f or t he i ndust r y. Accor di ng

t o Nour r y, i f Amazon r ai sed e- book pr i ces by even one or t wo

dol l ar s i t woul d sol ve t he pr obl em.

The Publ i sher Def endant s di d not bel i eve, however , t hat any

one of t hem act i ng al one coul d convi nce Amazon to change i t s

pr i ci ng pol i cy. They al so f ear ed t hat i f t hey di d not act as a

gr oup, Amazon woul d use i t s ever - gr owi ng power i n t he book

di st r i but i on busi ness t o r et al i at e agai nst t hem. As a r esul t ,

t he Publ i sher Def endant s conf er r ed about t hei r need t o act

col l ect i vel y i f t hey wer e to have any i mpact on Amazon s

pr i ci ng. As a Pengui n execut i ve r eport ed t o t he Pengui n Gr oup

Boar d of Di r ect ors under t he headi ng compet i t i on and

col l abor at i on, i t wi l l not be possi bl e f or any i ndi vi dual

publ i sher t o mount an ef f ect i ve r esponse t o Amazon because of

bot h t he r esour ces necessary and t he r i sk of r et r i but i on, so t he

i ndust r y needs t o devel op a common st r at egy.

Thus, as ear l y as December 2008, St ef an von Hol t zbr i nck of

Macmi l l an and Hachet t e s Nour r y agr eed t o exchange i nf ormat i on

and cooper at e ver y t i ght l y on al l i ssues ar ound e- books and t he

Ki ndl e. Nour r y expl ai ned t hat at t he hear t of our st r at egy

ar e di scussi ons among t op publ i sher s i n t he Uni t ed St at es t o

cr eat e an al t er nat i ve pl at f or m t o Amazon f or ebooks. He

obser ved, however , t hat t he goal of t hese vent ur es i s l ess t o


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compet e wi t h Amazon t han t o f orce i t t o accept a pr i ce l evel

hi gher t han 9. 99. Dur i ng t he Summer of 2009, Nour r y came t o

New Yor k andmet wi t h t he CEOs of Hachet t e s compet i t ors on J une

29 and 30. Nour r y r epor t ed af t er hi s f i r st day of meet i ngs t hat

t he movement i s posi t i ve wi t h r espect t o Macmi l l an, S&S,

Har per Col l i ns, and Pengui n. Whi l e he expr essed hi s cont i nued

f ear t hat Amazon s pr i ci ng woul d l ead t o sel l i ng cont ent at 7$

. . . [ l ] i ke i t wor ks i n t he musi c busi ness, he was r eassur ed

t o know t hat none of our compet i t ors want ed t hi s t o happen

ei t her .

On a f ai r l y r egul ar basi s, r oughl y once a quar t er , t he CEOs

of t he Publ i sher s hel d di nner s i n t he pr i vat e di ni ng r ooms of

New Yor k r est aur ant s, wi t hout counsel or assi st ant s pr esent , i n

order t o di scuss t he common chal l enges t hey f aced, i ncl udi ng

most pr omi nent l y Amazon s pr i ci ng pol i ci es. Bef or e one such

di nner , Hachet t e s Young pr omi sed Nour r y t hat he woul d r ai se

wi t h hi s compet i t or s t hei r opt i ons t o conf r ont t he pot ent i al l y

domi nant r ol e pl ayed by . . . Amazon i n e- books, i n or der t o

cont r ol t hei r st r at egy and pr i ci ng. As Young put i t , I hat e

[ Amazon s] bul l yi ng behavi or and wi l l be happy t o suppor t a

st r at egy t hat r est r i ct s t hei r pl ans f or wor l d domi nat i on.

As t he Publ i sher Def endant s CEOs t est i f i ed, t he Publ i sher s

di d not compet e wi t h each other on pr i ce; whi l e t hey wer e

ser i ous compet i t or s, t hei r pr ef er r ed f i el ds of compet i t i on wer e


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over aut hor s and agent s. Thus, t hey f el t no hesi t at i on i n

f r eel y di scussi ng Amazon s pr i ces wi t h each ot her and t hei r

j oi nt st r at egi es f or r ai si ng t hose pr i ces.

I n t he Fal l of 2009, Rei dy expl ai ned t o her super i or at

Si mon & Schust er s par ent company CBS Corpor at i on, Lesl i e

Moonves ( Moonves) , t hat S&S was consi der i ng sever al di f f erent

opt i ons t o get Amazon t o change i t s pr i ci ng. As Rei dy

expl ai ned,

we ve al ways known t hat unl ess ot her publ i sher s f ol l ow us,t her e s no chance of success i n get t i ng Amazon t o changei t s pr i ci ng pr act i ces. . . . And of cour se you wer e r i ghtt hat wi t hout a cr i t i cal mass behi nd us Amazon won t negot i at e, so we need t o be more conf i dent of how ourf el l ow publ i sher s wi l l r eact i f we make a move.

Rei dy assur ed Moonves, however , t hat she was f ai r l y sur e t hat

at l east t wo of t hem woul d qui ckl y f ol l ow us and woul d keep

t hi nki ng of how t o at t ack the pr obl em ( as we per cei ve i t ) of

cur r ent eBook pr i ci ng; as you r eal i ze, we t hi nk i t s t oo

i mpor t ant t o i gnore. Rei dy acknowl edged t o Moonves t hat we

need to gat her mor e t r oops and ammuni t i on f i r st !

I n addi t i on t o r ai si ng t he whol esal e pr i ce of e- books,

another st r ategy t hat Publ i sher Def endant s adopt ed i n 2009 t o

combat Amazon s $9. 99 pr i ci ng was t he del ayed r el ease or

wi t hhol di ng of t he e- book ver si ons of New Rel eases, a pr act i ce


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t hat was al so cal l ed wi ndowi ng. 10

I n or der f or t he t act i c of wi ndowi ng t o succeed, t he

Publ i sher s knew t hey needed t o act t oget her . That sever al

Publ i sher s synchr oni zed t he adopt i on and announcement of t hei r

wi ndowi ng st r at egi es was thus no mere coi nci dence. For exampl e,

By t he end of 2009, f our of

t he Publ i sher Def endant s - Macmi l l an, Si mon & Schust er ,

Hachet t e, and HarperCol l i ns - - had announced or i mpl ement ed a

pol i cy of wi ndowi ng some of t hei r most popul ar e- book t i t l es on

Amazon. By maki ng t he mor e expensi ve har dcover versi on

avai l abl e t o the publ i c bef or e t he l ower pr i ced e- book, t he

Publ i sher Def endant s hoped t o pr otect t he sal es of New Rel ease

hardcover books and to pr essur e Amazon to r ai se i t s e- book

pr i ces. Sar gent expl ai ned hi s suppor t f or wi t hhol di ng e- books

f r om Amazon i n t he f ol l owi ng t er ms, Ri ght now i t i s al l about

t act i cs whi l e we t r y t o get har dcover s over t he ar t i f i ci al l y l ow

9. 99 pr i ce poi nt , and we need t o do somet hi ng t o budge Amazon

f r om t hei r cur r ent st r at egy. Hachet t e s Young si mi l ar l y

bel i eved t hat wi ndowi ng . . . was t he onl y way we coul d deal

wi t h Amazon sel l i ng of f t he f ami l y j ewel s.

10 Publ i sher s had t r adi t i onal l y del ayed t he r el ease of paper back

ver si ons of har dcover books. Thi s pr act i ce i s known aswi ndowi ng. Whi l e t he del ayed r el ease of some e- book t i t l es,par t i cul ar l y t hose of popul ar New Rel eases, i s mor e t echni cal l yknown as wi t hhol di ng, many i n t he publ i shi ng i ndust r y al socal l ed i t wi ndowi ng, and t hat t er m wi l l al so be used i n t hi sOpi ni on t o ref er t o the del ayed r el ease of e- books as a st r at egyempl oyed by t he Publ i sher Def endant s t o pr essur e Amazon t o l i f ti t s e- book pr i ces.


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Hachet t e s Young t ol d Nour r y i n l at e Fal l 2009, [ c] ompl et el y

conf i dent i al l y, Car ol yn [ Rei dy] has t ol d me t hat t hey [ S&S] ar e

del ayi ng t he new St ephen Ki ng, wi t h hi s f ul l suppor t , but wi l l

not be announci ng t hi s unt i l af t er Labor Day. Under st andi ng

t he i mpr opr i et y of t hi s exchange of conf i dent i al i nf or mat i on

wi t h a compet i t or , Young advi sed Nour r y t hat i t woul d be

pr udent f or you t o doubl e del et e t hi s f r om your emai l f i l es when

you r et ur n t o your of f i ce. When Har per Col l i ns soon f ol l owed

wi t h i t s own wi ndowi ng announcement , del ayi ng t he di gi t al

r el ease of Sar ah Pal i n s Goi ng Rogue, Hachet t e s Nour r y

congr at ul at ed Mur r ay on hi s deci si on: Wel l done f or t he Pal i n

book, Nour r y wr ot e, and wel come to t he Cl ub!

The Publ i sher Def endant s synchr oni zed wi ndowi ng st r at egy

was publ i cl y r epor t ed and t i ed t o t hei r di scont ent wi t h Amazon s

pr i ci ng. A Wal l St r eet J our nal ar t i cl e of December 9, ent i t l ed

Two Maj or Publ i sher s t o Hol d Back E- Books, r eport ed t hat S&S

was wi ndowi ng i n order t o t ak[ e] a dr amat i c st and agai nst t he

cut - r at e $9. 99 pr i ci ng of e- book best sel l er s, and t hat

Hachet t e woul d f ol l ow sui t i n an ef f or t t o pr eser ve our

i ndust r y f r om aut hor s wor k bei ng sol d of f at bar gai n- basement

pr i ces. The ar t i cl e s aut hor not ed t hat publ i sher s have come

t o f ear t hat t he bar gai n pr i ces wi l l l ead consumer s t o concl ude

t hat books ar e wor t h onl y $10, or l ess, upset t i ng t he pr i ci ng

model t hat has sur vi ved f or decades. The ar t i cl e r epor t ed t hat


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S&S was i nt ent i onal l y f ocusi ng i t s wi ndowi ng ef f or t s on i t s most

popul ar t i t l es; as an S&S execut i ve expl ai ned, she was concer ned

t hat e- book sal es wer e canni bal i zi ng new best - sel l i ng

har dcover s, whi ch ar e t he mai nst ay of t he publ i shi ng busi ness.

A New Yor k Ti mes ar t i cl e of t he same day ent i t l ed

Publ i sher s Del ay E- book Rel eases, descr i bed an even br oader

ef f or t among t he Publ i sher Def endant s t o del ay t he di gi t al

r el ease of cer t ai n popul ar t i t l es. I t r epor t ed t hat

[ p] ubl i sher s have been debat i ng t he t i mi ng of e- books i n par t

as a way t o pr ot est t he l ow pr i ces - - t ypi cal l y $9. 99 - - t hat

onl i ne ret ai l er s l i ke Amazon and Sony ar e of f er i ng on ebook

ver si ons of new r el eases and best sel l er s. I t st at ed t hat at

l east f our Publ i sher s - - S&S, Hachet t e, Har per Col l i ns, and

Macmi l l an - al r eady had begun or announced an i nt ent i on t o

wi ndow e- books i n t he comi ng year . The ar t i cl e descr i bed t he

economi cs of wi ndowi ng and t i ed the st r at egy t o t he pr ot ect i on

of Publ i sher s physi cal book busi ness, st at i ng t hat

Al t hough publ i sher s curr ent l y recei ve t he same whol esal epr i ce f or an e- book t hat t hey r ecei ve f or a pr i nt book( meani ng t he r et ai l er t akes a l oss on t he sal e of t he mostpopul ar e- books) , publ i shi ng houses wor r y t hat event ual l y,Amazon and ot her e- book r et ai l er s wi l l pr essur e publ i sher s

t o t ake a smal l er cut on e- books. I n addi t i on, si nce 95per cent of t he busi ness st i l l comes f r om pr i nt booksel l er s,t he publ i sher s want t o pr event t hose r et ai l er s f r omr educi ng or der s.

The next day, t he Wal l St r eet J ournal si mi l ar l y announced

t hat ot hers had j oi ned t he wi ndowi ng movement , r epor t i ng t hat


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Har per Col l i ns J oi ns Ranks of Those Del ayi ng E- Books, as t he

debate over t he t i mi ng and pr i ci ng of e- books heats up. The

ar t i cl e st at ed t hat , begi nni ng i n ear l y 2010, Har per Col l i ns wi l l

del ay t he r el ease of f i ve t o t en har dcover t i t l es each mont h.

I t quot ed Mur r ay sayi ng, We have t o bel i eve t hat del ayi ng t he

e- book edi t i on hel ped har dcover sal es. The ar t i cl e al so

r epor t ed t hat Pengui n was wat chi ng t he cur r ent si t uat i on wi t h

i nt erest .

The t hree Publ i sher Def endant s who had announced t hei r

adopt i on of a wi ndowi ng pol i cy hoped t hat Macmi l l an, Pengui n,

and Random House woul d j oi n t hei r campai gn. As Nour r y expr essed

on December 6, i n order [ t ] o succeed our col l eagues must . . .

f ol l ow us. Fi ve days l at er , S&S s Rei dy advi sed Macmi l l an t hat

i t woul d l ove f or Macmi l l an t o j oi n Hachet t e, Har per Col l i ns,

and S&S i n wi ndowi ng, and f el [ t ] i f one more publ i sher comes

aboar d, ever yone el se wi l l f ol l ow sui t . On December 15,

Macmi l l an announced t hat , st ar t i ng i n J anuar y, i t woul d del ay

r el ease of most of i t s e- books f or 90 days. 11

Thi s l ef t onl y t wo of t he Bi g Si x not yet commi t t ed t o

wi ndowi ng. Pengui n s Maki nson r epor t ed i n December t hat

Hachet t e had st ar t ed t o put a l ot of pr essure on Pengui n t o

j oi n t he wi ndowi ng movement , but Pengui n r ef used t o do so.

I t was r epor t ed i n

t he Wal l St r eet J our nal on December 16.

11 As i t t ur ned out , Macmi l l an never i mpl ement ed t hi s pol i cy.


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Pengui n s McCal l was wel l awar e t hat [ i ] f ot her publ i sher s

don t f ol l ow sui t wi t h wi ndowi ng, Amazon s $9. 99 pr edat or y

pr i ci ng wi l l cont i nue, and we l l l ose. When Pengui n and Random

House chose not t o j oi n t hei r compet i t or s and del ay the r el ease

of e- books, Hachet t e s Young f ound t hei r r ef usal deepl y

di vi si ve and di sappoi nt i ng.

Even t hough by t he Wi nt er of 2009, f our of t he Publ i sher

Def endants had del ayed the r el ease of some e- books or announced

an i nt ent i on t o so, t hey knew t hat wi ndowi ng was not a l ong- t er m

sol ut i on t o Amazon s $9. 99 pr i ci ng model . Among other t hi ngs,

wi ndowi ng car r i ed ser i ous r i sks. As Sar gent r ecogni zed,

wi ndowi ng was r eal l y bad because i t encour aged pi r acy. Rei dy

not ed t hat wi ndowi ng di d not seem t he wi sest cour se si nce i t

doesn t seem smart t o penal i ze t he eBook r eader : we i n f act want

t o encour age eBook pur chases, so l ong as we can mai ntai n our

margi ns and i ncome. She f eared t hat wi ndowi ng coul d al i enate

an ent i r e por t i on ( and a gr owi ng one) of our audi ence. As

Sar gent admi t t ed t o an aut hor on December 14, whi l e wi ndowi ng

coul d be used as a shor t - t er m t act i c, [ w] i ndowi ng i s ent i r el y

st upi d, and actual l y makes no damn sense at al l r eal l y. As a

Pengui n st udy showed, when a Publ i sher del ayed t he rel ease of

e- books, i t s sal es never r ecover ed. The l ost cust omer s nei t her

bought t he pr i nt book at a hi gher pr i ce nor r et ur ned t o pur chase

t hose e- books when t hey f i nal l y became avai l abl e.


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Sargent , f or one, hoped t hat over t i me Publ i sher s woul d be

abl e to move t o a syst em of si mul t aneous r el ease of e- books wi t h

t hei r physi cal count er par t s, but at a hi gher pr i ce poi nt of

bet ween $12. 95 and $14. 95. I n order t o do so, t he Publ i sher s

woul d need t o f i nd a way t o gai n l ong- t er m cont r ol over pr i ci ng,

i ncl udi ng on Amazon. The quest i ons i s, Sargent wonder ed, how

t o get t her e? Ot her Publ i sher Def endant s envi si oned even

hi gher pr i ce poi nt s f or e- books, but ponder ed t he same

f undament al di l emma. I t was i n t hi s cont ext t hat Appl e ar r i ved

on t he scene and pr ovi ded t he Publ i sher Def endant s wi t h the

means t o achi eve t hei r shar ed goal .

D. Appl e s Devel opment of i BooksAppl e i s one of Amer i ca s most admi r ed, dynami c, and

successf ul t echnol ogy compani es. I t s i nnovat i ve devi ces ar e

i mmensel y popul ar not onl y i n t hi s count r y but around t he wor l d.

But , as of 2009, Appl e had no e- bookst ore. Consumers coul d r ead

e- books on Appl e s devi ces t hr ough t hi r d par t y sof t war e, such as

apps, but Appl e di d not yet have i t s own e- r eadi ng sof t ware or

e- bookst or e wi t h a col l ect i on of books avai l abl e f or pur chase.

Appl e di d not have an e- bookst ore i n 2009 because i t di d

not yet have a devi ce t hat i t s f ounder St eve J obs ( J obs)

bel i eved woul d be a gr eat e- r eader . He demanded no l ess bef ore

he woul d i nvest hi s company s ener gi es i n e- books. That was

about t o change.


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I n 2009, Appl e was cl ose t o unvei l i ng t he i Pad. Wi t h t hi s

r evol ut i onar y tabl et , Appl e was abl e t o cont empl at e t he ar r i val

of i t s f i r st gr eat devi ce f or r eadi ng e- books. Ther ef or e, under

t he di r ect i on of Appl e s Cue, Moer er and other s began st udyi ng

t he e- book i ndust r y. As of 2009, Cue had worked at Appl e f or

t went y years and had pl ayed a maj or r ol e i n cr eat i ng Appl e s

cont ent st or es, begi nni ng wi t h Appl e s Onl i ne St or e i n 1998, t he

i Tunes St ore i n 2003, and t he App St ore i n 2008. Si nce 2004,

Cue had been r esponsi bl e f or r unni ng al l of Appl e s di gi t al

cont ent st or es and had l ed Appl e s negot i at i ons i n i t s deal s

wi t h maj or cont ent pr ovi der s.

By J une, Cue s t eam had assembl ed dat a t hat showed t hat t he

book mar ket i n Nor t h Amer i ca was l arger t han t he musi c market .

The book i ndust r y was est i mat ed t o be r oughl y $35 t o $42 bi l l i on

i n si ze, wi t h t r ade books compr i si ng $12. 5 bi l l i on of t hat

f i gur e. Whi l e t r ade e- books account ed f or j ust $100 mi l l i on or

so of t hose numbers, t hat market was growi ng at an exponent i al

r ate. Appl e s McDonal d pr edi ct ed t hat t he e- book market coul d

r each near l y $1 bi l l i on i n 2010.

Appl e, of course, knew t hat Amazon was t he domi nant

e- r et ai l er ( e- t ai l er ) of books. Whi l e par t of Amazon s

success coul d be at t r i but ed t o i t s Ki ndl e, Appl e under st ood t hat

anot her r eason f or Amazon s success i n t he e- book market was i t s

l ow pr i ces. As of t hat t i me, Appl e had l i t t l e exper i ence wi t h


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compet i ng on pr i ce when sel l i ng cont ent ; i ndeed, i t consi der ed

i t sel f a pr i ce l eader i n sel l i ng musi c, apps, and ot her

cont ent .

I t was al so cl ear t o Cue t hat al l t he cont ent owner s hat e

Amazon. 12

By November 2009, Appl e had compi l ed a Busi ness Out l ook

f or audi o book and e- book oppor t uni t i es. I t concl uded t hat

sel l i ng e- books as i ndi vi dual apps was f l awed. I t was at t hat

r el at i vel y l at e dat e t hat J obs aut hor i zed Cue t o pur sue t he

devel opment of a dedi cated Appl e e- bookst ore ( t he i Bookst ore)

f or t he i Pad. Appl e pl anned t o demonst r at e t he i Pad t o t he

publ i c at t he Launch on J anuary 27, 2010, and pl anned t o shi p

t he devi ces t o stor es i n ear l y Apr i l 2010.

As ear l y as Febr uar y 2009, Cue recogni zed that [ t ] he

book publ i sher s woul d do al most anythi ng f or us t o get i nt o t he

ebook busi ness. Appl e had al so di scover ed anal yst r epor t s i n

J une 2009 t hat i ndi cat ed t hat a pr i ce of $12. 99 coul d be a mor e

pr of i t abl e pr i ce poi nt f or e- books t han Amazon s $9. 99.

Appl e bel i eved t hat t he i Pad woul d be a t r ansf ormat i onal

e- r eader . I n cont r ast t o t he bl ack- and- whi t e e- r eader devi ces

on t he market at t he t i me, t he i Pad woul d have the capaci t y t o

di spl ay not onl y e- book t ext but al so e- book i l l ust r at i ons and

phot ogr aphs i n col or on a backl i t scr een. The i Pad woul d al so

12 Cue at t r i but ed t he Publ i sher s hat r ed of Amazon t o Amazonl ever agi ng [ i t s] f or ce i n physi cal [ books] t o f or ce [ t hePubl i sher s] i nt o bad deal s i n e- books.


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have audi o and vi deo capabi l i t i es and a t ouch scr een, whi ch

Appl e bel i eved woul d be seen by reader s as a par t i cul ar l y

at t r acti ve f eat ur e.

Even t hough the i Pad Launch woul d happen wi t h or wi t hout an

i Bookst ore, Appl e di d hope t o announce i t s new i Bookst ore at t he

Launch. Thi s woul d ensure maxi mum consumer exposure and provi de

a dr amat i c component of t he Launch. But , t hi s l ef t Cue wi t h

l ess t han t wo mont hs f or Appl e t o acqui r e enough cont ent t o

cr eat e a vi abl e Appl e e- bookst or e, and t hat per i od i ncl uded t he

Chr i st mas and New Year hol i days. 13

Cue al so had hi s own r easons f or worki ng har d t o make t he

i Bookst or e a r eal i t y i n t i me f or t he Launch. He was, of cour se,

an abl e and exper i enced negot i at or . He t ook pr i de i n al l he had

achi eved f or Appl e and want ed t o succeed i n addi ng an

e- bookst or e t o i t s ot her cont ent domai ns. Cue bel i eved t hat

wi t h t he i nt r oduct i on of t he i Pad t he i Bookst or e hel d t he

As a r esul t , Appl e

st r eaml i ned i t s ef f or t s and concent r at ed on execut i ng agr eement s

wi t h t he Bi g Si x Publ i sher s f or t r ade e- books. I t woul d br oaden

i t s campai gn t o add more publ i sher s and t o i ncl ude other ki nds

of e- books, i ncl udi ng t ext books and ever y ot her ki nd of e- book,

af t er t he Launch.

13 The record does not r eveal when Appl e began t o devel op t hesof t war e f or t he i Bookstor e, but i t i s cl ear t hat Appl e wasi nt ensel y engaged i n t hat devel opment t hr oughout t hi s t wo mont hwi ndow.


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pot ent i al t o be anot her r ousi ng success f or hi s company. But ,

beyond pr of essi onal pr i de, Cue had more personal r easons f or

maki ng t he i Bookst or e a r eal i t y i n r ecor d- br eaki ng t i me. Cue

knew t hat J obs was ser i ousl y i l l and t hat t hi s woul d be one of

hi s l ast oppor t uni t i es to br i ng t o l i f e one of J obs s vi si ons

and t o demonst r at e hi s devot i on t o t he man who had gi ven hi m t he

oppor t uni t y t o hel p t r ansf or m Amer i can cul t ur e.

E. December 15 t o 16, 2009: Appl e s Fi r st New Yor k Meet i ngswi t h Publ i sher s

Begi nni ng on December 8, 2009, Cue s t eam cont act ed t he

Publ i sher s t o set up meet i ngs t he f ol l owi ng week t o di scuss an

ext r emel y conf i dent i al subj ect . Appl e made i t cl ear i n t hese

cal l s t hat i t woul d be t r yi ng t o meet wi t h each of t he Bi g Si x

CEOs on i t s whi r l wi nd t r i p t o New Yor k Ci t y.

Appl e s r equest s f or meet i ngs i n New Yor k was an exci t i ng

t ur n of event s f or t he Publ i sher s and pr ompt ed a f l ur r y of

t el ephone cal l s among t hem. They specul at ed about how t hey

mi ght t ur n Appl e s ent r y i nt o t he e- book busi ness t o t hei r

advant age i n t hei r bat t l e wi t h Amazon. They were wel l aware of

t he pr ess r epor t s t hat Appl e woul d be announci ng t he ar r i val of

anot her r evol ut i onar y devi ce. Rei dy, Mur r ay, and Young

exchanged at l east f i ve t el ephone cal l s on December 10 and 11

al one. These cal l s among t he Publ i sher Def endant s CEOs woul d

cont i nue and i nt ensi f y at cr i t i cal moment s dur i ng t he cour se of


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t he Publ i sher s ensui ng negot i at i ons wi t h Appl e. 14

Even bef ore i t met wi t h any of t he Publ i sher s on December

15, Appl e al r eady knew sever al t hi ngs t hat ar e i mpor t ant t o t he

event s t hat woul d unf ol d i n t he comi ng weeks. As pr evi ousl y

descr i bed, Appl e under st ood t hat t he Publ i sher s want ed t o

pr essure Amazon t o r ai se t he $9. 99 pr i ce poi nt f or e- books, t hat

t he Publ i sher s wer e sear chi ng f or ways t o do t hat , and t hat t hey

wer e wi l l i ng t o coor di nat e t hei r ef f or t s t o achi eve t hat goal .

By December 15, t he Wal l St r eet J our nal and New Yor k Ti mes

ar t i cl es of December 9 and 10 had descr i bed t he wi ndowi ng

commi t ment made by t hree of t he Bi g Si x. Cue vi ewed t he e- book

mar ket at t he t i me t o be dysf unct i onal and r i pe f or Appl e s

ar r i val .

See

Appendi x A.

For i t s par t , Appl e had deci ded t hat i t woul d not open t he

i Bookst ore i f i t coul d not make money on t he st ore and compet e

ef f ect i vel y wi t h Amazon. 15

14 The t el ephone cal l s among the Publ i sher Def endant s dur i ng theper i od of t hei r negot i at i ons wi t h Appl e r epr esent ed a depar t ur ef r om t he or di nar y pat t er n of cal l s among t hem. By cont r ast ,

t her e was onl y one t el ephone cal l made bet ween t hese CEOs dur i ngt he week pr i or t o Appl e s f i r st cont act wi t h t he Publ i sher s onDecember 8.

Appl e knew t hat i t needed access t o a

15 Some mont hsear l i er , Appl e had consi der ed pr oposi ng t o Amazont hat t hey si mpl y di vi de t he e- mar ket f or books and musi c, wi t hi Tunes act i ng as an ebook r esel l er excl usi ve t o Amazon andAmazon becom[ i ng] an audi o/ vi deo i Tunes r esel l er excl usi ve t oAppl e.


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l ar ge number of t i t l es. I t was unwi l l i ng t o al l ow e- books t o be

wi ndowed at any Appl e st ore. Appl e al so pr ef er r ed t o sel l

e- books at pr i ces bel ow t hei r physi cal count er par t s, al t hough

t hat obj ect l ar gel y f el l by t he waysi de i n t he comi ng weeks.

Pr i or t o meet i ng wi t h t he Publ i sher s, Appl e assumed t hat i t

woul d pur chase e- books f r om t hem under t he whol esal e model and

r esel l t hem, i n l i ne wi t h t he ar r angement Appl e used t o obt ai n

movi es and TV shows f or r esal e t hr ough i t s i Tunes st ore.

As a mast er negot i at or , Cue came wel l pr epared f or hi s

meet i ngs. He knew how t o convey Appl e s condi t i ons f or ent r y

and at t he same t i me gi ve t he Publ i sher s an i ncent i ve f or

ent er i ng, al most over ni ght , i nt o a par t ner shi p wi t h Appl e. He

deci ded t o ent i ce t he Publ i sher s by conveyi ng an unambi guous

message t hat Appl e was wi l l i ng t o sel l e- books at pr i ces up t o

$14. 99, t hat i s, at a pr i ce poi nt $5 above Amazon s pr i ce f or

many New Rel eases and NYT Best sel l er s.

Cue, Moer er , and t hei r i n- house at t orney Saul met

separ at el y wi t h Hachet t e, Pengui n, and Random House on December

15, and wi t h Harper Col l i ns, Macmi l l an, and S&S on December 16.

I f t her e was one Publ i sher t hat Appl e most desi r ed t o have i n

i t s i Bookstor e, i t was Random House, t he l ar gest Publ i sher . As

event s unf ol ded, however , t hat woul d be the onl y Publ i sher who

decl i ned t o j oi n t he i Bookst or e bef or e the Launch.


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Fol l owi ng a scr i pt , Appl e conveyed i n each of t hese

meet i ngs t hat i t hoped t o be abl e t o begi n sel l i ng e- books

t hr ough an e- bookst ore wi t hi n t he next 90 days as a f eatur e on a

new web- enabl ed machi ne. Appl e expect ed t hat i t s ent r y i nt o t he

market wi t h an i Bookst ore on t hi s devi ce woul d hel p make books

cool f or t he i Tunes gener at i on and qui ckl y make Appl e t he

vehi cl e t hr ough whi ch a si gni f i cant per cent age of e- books wer e

sol d.

Cue emphasi zed that Appl e woul d onl y l aunch an e- bookst ore

i f i t got al l of t he maj or Publ i sher s to si gn on. As Cue

i nt ended, each of t he Publ i sher s under st ood t hat t hi s was a

r ef er ence t o t he Bi g Si x.

The par t i es exchanged t hought s about a wor kabl e busi ness

model i n t hese meet i ngs. Appl e l earned t hat cur r ent whol esal e

pr i ces f or e- books t ypi cal l y f el l i n t he r ange of $13 t o $15,

and some were even sol d at pr i ces as hi gh as $17. 50. Cue t ol d

Publ i sher s t hat t hey woul d need t o l ower t hei r whol esal e pr i ces

f or Appl e i f Appl e wer e t o ent er t he busi ness. I n or der f or

Appl e t o compet e wi t h Amazon i t needed t o be abl e to pr i ce e-

books as cheapl y as Amazon di d, and i t was not wi l l i ng t o pur sue

a st r at egy of l oss l eader s. As Rei dy r ecor ded, Appl e expr essed

t hat i t cannot t ol er at e a mar ket wher e t he pr oduct i s sol d

si gni f i cant l y mor e cheapl y el sewher e.


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Wel l awar e of t he Publ i sher s exper i ment at i on wi t h

wi ndowi ng, Appl e al so t ol d Publ i sher s t hat i t opposed wi ndowi ng;

i t bel i eved t hat wi t hhol di ng e- books al i enat ed cust omer s and l ed

t o pi r acy. Random House and Macmi l l an agr eed, t el l i ng Appl e

t hat t hey bel i eved wi ndowi ng was a t er r i bl e, sel f - dest r uct i ve

i dea, even t hough Macmi l l an admi t t ed t hat i t mi ght be

consi der i ng hol dbacks on some NYT Best sel l er s.

Hachet t e and l at er Har per Col l i ns sur pr i sed Appl e wi t h t hei r

suggest i on t hat , i nst ead of a whol esal e model , Appl e adopt an

agency model f or t he di st r i but i on of e- books. Hachet t e t ol d

Appl e t hat i t had al r eady di scussed swi t chi ng t o an agency model

wi t h Barnes & Nobl e and had concl uded t hat i t was an at t r act i ve

busi ness model f or sel l i ng e- books. 16

Mai nl y, however , t he Publ i sher s t ol d Appl e how unhappy t hey

wer e wi t h Amazon s $9. 99 pr i ce poi nt . Ever y Publ i sher wi t h whom

Appl e met l ament ed Amazon s pr i ci ng New Rel eases and NYT

Best sel l er s at $9. 99. Sever al of t hem made cl ear t hat t hey wer e

act i vel y sear chi ng f or a way to gai n mor e cont r ol over pr i ci ng

and wer e i mpl ement i ng t act i cs t hey di d not enj oy, l i ke

Dur i ng t hese meet i ngs, Cue

r ej ect ed t he i dea. Wi t hi n days, however , he woul d r econsi der

t hei r suggest i on.

16 Hachet t e s Thomas had spoken t o a HarperCol l i ns execut i ve onDecember 10, i n advance of t hei r meet i ngs wi t h Appl e, r egardi ngexpl or i ng agency as an al t er nat i ve busi ness model .


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wi ndowi ng, i n an at t empt t o ef f ect t he change t hat was of utmost

i mpor t ance t o t hem.

For exampl e, Pengui n i n i t s meet i ng wi t h Appl e shar ed i t s

vi ew t hat a $9. 99 e- book was not a sust ai nabl e model . The

next day, S&S f r ankl y admi t t ed hat i ng Amazon pr i ci ng, and

Har per Col l i ns r eveal ed t hat i t was i nt er est ed i n t he agency

model i n or der t o f i x Amazon pr i ci ng. Har per Col l i ns advocat ed

t hat e- book pr i ces be set i n t he r ange of $18 t o $20, whi ch Cue

vi ewed as ut t er l y unr eal i st i c. Li st eni ng t o t he Publ i sher s, Cue

under st ood t hat t hey wer e af r ai d t hat Amazon s pr i ci ng st r ategy

t hr eat ened t hei r over al l busi ness.

Appl e, i n t ur n, assur ed t he Publ i sher s t hat i t was not

i nt er est ed i n ent er i ng t he e- book mar ket by pur sui ng a l ow- pr i ce

st r at egy. Appl e opi ned t hat $9. 99 was not yet engr ai ned i n

t he consumer mi nd, and suggest ed i n each meet i ng pr i ci ng e- books

at bet ween $11. 99 and $14. 99. The Publ i sher s wer e t hr i l l ed.

Macmi l l an agr eed i mmedi at el y wi t h Appl e s suggest ed $14. 99

r et ai l pr i ce f or New Rel eases.

As Cue pr ompt l y r epor t ed t o J obs on December 15, af t er he

had compl et ed t he f i r st t hr ee of hi s si x meet i ngs, [ c] l ear l y,

t he bi ggest i ssue i s new r el ease pr i ci ng and t hey want a

pr oposal f r om us. Cue was conf i dent t hat he woul d be abl e t o

bui l d t he i Bookst or e i n t i me f or t he Launch. As he t ol d J obs,

[ n] ot hi ng scar ed me or made me f eel l i ke we can t get t hese


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deal s done r i ght away. I n hi s vi ew, t he Publ i sher s had been

ecst at i c about what Appl e s ar r i val coul d mean f or t hei r

i ndustr y.

On t he heel s of t hei r i ni t i al meet i ngs wi t h Appl e, t he

Publ i sher Def endant s ent husi ast i cal l y shar ed the good news t hat

Appl e was wi l l i ng t o ent er t he e- book market wi t h a

si gni f i cant l y hi gher pr i ce poi nt f or newl y- r el eased e- books. On

December 17, Rei dy report ed t he [ t ] er r i f i c news! t o Moonves

t hat Appl e was ent er i ng t he e- book market and was not

i nt er est ed i n a l ow pr i ce poi nt f or di gi t al books. Rei dy

under st ood t hat t hey [ Appl e] don t want Amazon s $9. 95 to

cont i nue. Hachet t e s Nour r y si mi l ar l y t ol d Cue af t er t hei r

i ni t i al meet i ng t hat he was gl ad i t appear ed our busi ness

i nt er est s ar e ver y much al i gned. Har per Col l i ns l at er r ef l ect ed

t hat Appl e was t he Publ i sher s best par t ner because i t

do[ es] n t l i ke deep di scount i ng.

Sever al of t he Publ i sher s hashed over t hei r meet i ngs wi t h

Appl e wi t h one anot her . Af t er Young had met wi t h Appl e but

bef or e S&S had i t s meet i ng, Young coul d not r esi st cal l i ng Rei dy

t o shar e the wonder f ul news t hat t he Top Man at Appl e opposed

$9. 99 pr i ci ng. He hesi t at ed t o say more because S&S woul d be

meet i ng wi t h Appl e the f ol l owi ng day, and he di d not want t o

spoi l [ t he] f un. Young and Rei dy pr omi sed t o check i n wi t h

each ot her af t er S&S had i t s meet i ng wi t h Appl e, and di d so i n


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sever al cal l s over t he cour se of t he next t wodays. 17

F. Appl e Swi t ches Gear s and Pr esent s An Agency Model wi t h30% Commi ssi on

At a

br eakf ast meet i ng, Pengui n s Maki nson di scussed t he Appl e

meet i ngs wi t h Hachet t e s Nour r y. On December 17, Ruper t

Mur doch, Chai r man and CEOof HarperCol l i ns parent company News

Corp, r el ayed t o Random House t hat Appl e woul d soon be l aunchi ng

an e- r eader and woul d be sel l i ng books at 15 dol l ar s. Char l i e

Redmayne, a Har per Col l i ns di gi t al of f i cer , bl unt l y suggest ed t o

Mur r ay i mmedi at el y af t er t hei r meet i ng wi t h Appl e on December 16

t hat t hey coor di nate a r esponse to Appl e wi t h t he other

Publ i sher s. As Redmayne wr ot e, i n l i ght of t hei r [ g] r eat

meet i ng . . . I wou[ ] l d t al k t o t he ot her CEO s ear l y and l ook

t o pr esent i n ear l y J an.

Havi ng r ecei ved an ent husi ast i c recept i on f r om t he

Publ i sher s, t he Appl e t eam r et ur ned t o Appl e s headquar t er s i n

Cuper t i no, Cal i f or ni a and qui ckl y absorbed what i t had hear d.

One i dea that i t consi der ed pr oposi ng t o t he Publ i sher s, but

r ej ect ed, was an acr oss- t he- boar d 25% di scount f or e- books of f

t he whol esal e pr i ce f or physi cal books. Wi t h many NYT

Best sel l er s havi ng a $12 whol esal e pr i ce f or t he har dcover book,

t hi s woul d al l ow a $9 di gi t al whol esal e pr i ce, whi ch Appl e s

17 On December 15, Hachet t e s Young spoke t o S&S s Rei dy byt el ephone pr i or t o hi s meet i ng wi t h Cue. On December 16, Rei dycal l ed Young j ust mi nut es af t er her meet i ng wi t h Cue had ended.The next day, t he t wo exchanged t hree cal l s.


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Moer er t hought shoul d be accept abl e t o t he Publ i sher s f or al l

of t hei r e- books wi t h t he possi bl e except i on of a f ew

bl ockbust er s.

Cue qui ckl y deci ded, however , t o go a di f f er ent r out e.

Unl ess t he Publ i sher s agr eed t o l ower whol esal e pr i ces f or

e- books, Appl e woul d r un t he r i sk of l osi ng money i f i t t r i ed or

was f or ced t o mat ch Amazon s pr i ci ng t o r emai n compet i t i ve. The

whol esal e model al so al l owed t he Publ i sher s t o t r y t o cont r ol

di gi t al book pr i ces by wi ndowi ng e- books. As Appl e had

expr essed t o t he Publ i sher s, i t st r ongl y bel i eved t hat

wi t hhol di ng cont ent woul d i nt er f er e wi t h t he gr owt h of t he

di gi t al mar ket and was i nconsi st ent wi t h i t s busi ness goal s and

pr act i ces. Appl e t hus embr aced t he model t hat Hachet t e and

HarperCol l i ns had pr oposed - t he agency model . Appl e was

al r eady f ami l i ar wi t h thi s model si nce i t used t he agency model

t o sel l apps t hr ough i t s App St or e.

Appl e r eal i zed t hat t he r ecent t ur moi l i n t he di gi t al book

busi ness st r engt hened i t s hand i n pr oposi ng thi s new busi ness

model t o t he Publ i sher s. Appl e di d not have t o open an e-

bookst ore when i t l aunched t he i Pad; i t coul d add t he i Bookst or e

l at er . On t he ot her hand, t he Publ i sher s wer e sear chi ng f or an

al t er nat i ve t o Amazon s pr i ci ng pol i ci es and exci t ed about

Appl e s ent r y i nt o t he e- book i ndust r y and t he pr ospect t hat

t hat ent r y woul d gi ve t hem l ever age i n t hei r negot i at i ons wi t h


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Amazon. Appl e appr eci ated t hat , i n t he words of Macmi l l an s

Sar gent , t he Publ i sher s vi ewed Appl e as of f er [ i ng] t he si ngl e

best oppor t uni t y [ t hey] woul d ever have t o cor r ect t he i mbal ance

i n our e- book market .

Appl e set t l ed on an agency model wi t h a 30% commi ssi on, t he

same commi ssi on i t was usi ng i n i t s App St ore. Agency woul d

gi ve t he Publ i sher s t he cont r ol over e- book pr i ci ng t hat t hey

desi r ed, and ensur ed that Appl e woul d make a pr of i t f r om ever y

e- book sal e i n i t s i Bookst or e wi t hout havi ng t o compet e on

pr i ce. Appl e r eal i zed, however , t hat i n handi ng over pri ci ng

deci si ons t o t he Publ i sher s, i t needed t o r est r ai n t hei r desi r e

t o r ai se e- book pr i ces sky hi gh. I t deci ded t o r equi r e r et ai l

pr i ces t o be r est r ai ned by pr i ci ng t i er s wi t h caps. Whi l e Appl e

was wi l l i ng t o r ai se e- book pr i ces by as much as 50% over

Amazon s $9. 99, i t di d not want t o be embar r assed by what i t

consi der ed unr eal i st i cal l y hi gh pr i ces.

The agency model presented one si gni f i cant probl em. Appl e

want ed i t s i Bookst or e t o be a r ousi ng success. For t hat t o

happen, Appl e needed not onl y cont ent but al so cust omers. Appl e

r eal i zed t hat i f i t moved to an agency model wi t h t he

Publ i sher s, Appl e woul d be at a compet i t i ve di sadvant age so l ong

as Amazon r emai ned on t he whol esal e model and coul d pr i ce New

Rel eases and NYT Best sel l er s at $9. 99, or even l ower t o compet e

wi t h Appl e. Si nce i t was i nevi t abl e t hat t he Publ i sher s woul d


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r ai se e- book pr i ces when gi ven t he oppor t uni t y - i ndeed, Appl e

expect ed t he Publ i sher s t o r ai se t he pr i ces t o t he t i er caps - -

e- books pr i ced at $9. 99 by Amazon woul d doom t he i Bookst ore.

Why woul d a consumer buy an e- book i n t he i Bookst ore f or $14. 99

when i t coul d downl oad i t f r om Amazon f or $9. 99?

To ensur e t hat t he i Bookst or e woul d be compet i t i ve at

hi gher pr i ces, Appl e concl uded t hat i t needed t o el i mi nat e al l

r et ai l pr i ce compet i t i on. Thus, t he f i nal component of i t s

agency model r equi r ed t he Publ i sher s t o move al l of t hei r

e- t ai l er s to agency. Appl e expect ed t hat t hi s pr oposal woul d

appeal t o t he Publ i sher s. Af t er al l , i t woul d al l ow t hem t o

f i x t hei r pr obl em wi t h Amazon s pr i ci ng.

Appl e s f i r st meet i ngs wi t h t he Publ i sher s i n New Yor k had

occur r ed on a Tuesday and Wednesday. J ust t hr ee days l at er , on

Sat ur day, Cue was r eady t o t est dr i ve hi s agency model and hear

pr el i mi nar y r eact i ons f r om t he Publ i sher s. On December 19, Cue

emai l ed t hr ee of t he si x Publ i sher s CEOs t o set up t hi r t y

mi nut e meet i ngs f or t he f ol l owi ng Monday or Tuesday t o updat e

you [ on] al l my f i ndi ngs and t hought s. Cue al r eady knew f r om

t he meet i ngs ear l i er i n t he week t hat Hachet t e and Har per Col l i ns

were enamored of t he agency model and di d not cont act t hem agai n

at t hi s st age. He had pegged Pengui n s CEO as a f ol l ower , and

chose t o hol d of f on cont act i ng hi m. Af t er al l , Pengui n and

Random House wer e t he onl y Publ i sher s t hat had not publ i cl y


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announced any pl ans t o wi t hhol d e- books f r om Amazon. Cue

deci ded i nst ead t o t est hi s pr oposal wi t h S&S, Macmi l l an, and

Random House.

Cue chose t hese t hr ee Publ i sher s car ef ul l y. He consi der ed

Rei dy a r eal l eader among her f el l ow CEOs. He was not wr ong.

As descr i bed bel ow, she was i nst r ument al i n convi nci ng both

Pengui n and Macmi l l an t o si gn up wi t h Appl e when t hey were

waver i ng. She was i n f r equent cont act wi t h Young, Shanks and

Sar gent at ever y cr i t i cal j unct ur e i n t he weeks bef or e t he

Launch.

Cue r eached out t o Macmi l l an s Sar gent f or a di f f er ent

r eason. He had been i mpr essed wi t h Sargent s per sonal hi st ory,

i n par t i cul ar hi s f ami l y s st or i ed connect i on wi t h t he

publ i shi ng i ndust r y. 18

Cue succeeded i n speaki ng wi t h key execut i ves f r om each of

t hese t hr ee Publ i sher s ear l y t he f ol l owi ng week. He expl ai ned

t hat he had met wi t h al l of t he Bi g Si x t he pr ecedi ng week, and

had come t o the concl usi on t hat t he way f orward woul d i nvol ve

f our component s. Fi r st , t he e- book i ndust r y needed t o move t o

t he agency model , whi ch woul d al l ow t he Publ i sher s t o set t he

Cue bel i eved t hat a par t ner shi p wi t h

Macmi l l an woul d add cach. But , most i mpor t ant l y, Cue want ed

t he l argest Publ i sher , Random House, t o come on boar d.

18 Sar gent s f at her , J ohn Tur ner Sar gent , Sr . , was t he Pr esi dentand CEO of t he Doubl eday & Company publ i shi ng house f r om 1963 t o1978, and l ed t he company s expansi on i nt o an i ndust r y gi ant .


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pr i ces and i nt r oduce what Cue euphemi st i cal l y t ermed some l evel

of r easonabl e pr i ci ng. Second, Appl e woul d need a 30% margi n

on e- books sol d t hr ough Appl e. Thi r d, he pr oposed set t i ng

pr i ces f or New Rel ease e- books at $12. 99, t hat i s, $3 over

Amazon s $9. 99 pr i ce. Fi nal l y, t o r emove al l r et ai l pr i ce

compet i t i on, t he Publ i sher s woul d have t o adopt t he agency model

f or al l of thei r e- tai l ers .

Rei dy descr i bed her conver sat i on wi t h Cue i n a det ai l ed

emai l t o col l eagues at S&S t hat day. Accor di ng t o Rei dy, Cue

di dn t t hi nk anyt hi ng [ ot her t han t he agency model ] woul d keep

t he mar ket f r om i t s cur r ent pr i ci ng crazi ness. Rei dy di d not

hesi t at e over t he suggest i on t hat t he i ndust r y as a whol e be

moved t o an agency model ; Rei dy had r epl i ed t o Cue, i f we make

t hese our t er ms, t hen t hey are our t er ms. Over al l , Rei dy was

i nt r i gued, but wor r i ed t hat t he 30% commi ssi on f or Appl e woul d

be t oo st eep.

Mar kus Dohl e ( Dohl e) , Chai r man and CEO of Random House at

t he t i me, si mi l ar l y descr i bed hi s conver sat i on wi t h Cue t o

col l eagues at Random House. Dohl e r eport ed t hat Cue t hi nks

t hat book pr i ces ar e becomi ng t oo l ow - - he i s wor r i ed about t he

consumer per cept i on. Theref ore he suggest s an agency model .

El i mi nat i ng pr i ce compet i t i on wi t h Amazon was essent i al t o Cue

si nce [ h] e assumes t hat i f we f i nd a new TOS [ t er ms of sal e,

whol esal e] model whi ch woul d pr ovi de A[ ppl e] wi t h an accept abl e


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mar gi n, Amazon woul d l ower t he pr i ces agai n f ol l owi ng . . .

t hei r l oss l eader [ ] st r at egy. As Dohl e r epor t ed, when he

expr essed concern about Amazon s wi l l i ngness t o accept an agency

model , Cue suggest ed t hat wi ndowi ng coul d be used t o est abl i sh

a di st r i but or [ agent ] model i f Amazon bal ked.

Shor t l y af t er hi s conver sat i on wi t h Cue, Sar gent wr ot e t o

Cue t o suggest a pr i ci ng st r at egy that woul d al l ow Publ i sher s t o

pr i ce some e- books at $19. 95, but t hat put t he maj or i t y of new

r el eases at t he 14. 95 or 12. 95 pr i ce poi nt s. I nt r oduci ng t he

concept of a dual model , an i dea t hat woul d cont i nue t o have

appeal f or Sar gent i n t he f ol l owi ng weeks, Sar gent al so

suggest ed t hat Appl e of f er t wo al t er nat i ve t er ms of sal e - a

30% agency model wi t h no wi ndowi ng, and [ a] [ d] i scount model

t hat i ncl udes wi ndowi ng - - al l owi ng each Publ i sher t o deci d[ e]

whi ch model t o buy under . Sar gent l at er r ef l ect ed t o anot her

Macmi l l an execut i ve t hat he bel i eved t hi s dual appr oach [ w] oul d

f orce Amazon s hand.

On December 21, Cue advi sed J obs t hat hi s t al ks wi t h t he

Publ i sher s had gone wel l and ever yone under st ood our posi t i on

and t hought i t was r easonabl e. Cue obser ved t hat t he

Publ i sher s r ecogni zed t he pl us of movi ng t o an agency model ,

namel y i t sol ves Amazon i ssue. 19

19 Cue asser t ed at t r i al t hat sol ves Amazon i ssue r ef er r ed t opr i ci ng e- books i n t he i Bookst ore above $9. 99, and was not a

On t he negat i ve si de, t hey


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were t r oubl ed by a commi ssi on f or Appl e t hat was as hi gh as 30%.

That gave t he Publ i shers a l i t t l e l ess t han t hey woul d l i ke.

As of t hat poi nt , Cue bel i eved t hat t he Publ i sher s wer e wi l l i ng

t o pur sue a st r at egy of movi ng al l of t hei r e- t ai l er s t o t he

agency model , and i n f act sever al Publ i sher s had t ol d hi m so.

The Publ i shers bel i eved, however , t hat a $12. 99 pr i ce f or an

e- book woul d be t oo l ow i f t he physi cal book sol d f or more t han

$35. Cue r eport ed t hat he had ur ged t hem t o f ocus on t he other

99% and we can f i gur e out how t o sol ve t he except i ons l ater .

r ef er ence t o r ai si ng pr i ces across t he i ndust r y or el i mi nat i ngAmazon s abi l i t y t o set pr i ces. I ndeed, Cue pr ot est ed at t r i alt hat , t hr oughout i t s negot i at i ons wi t h t he Publ i sher Def endant s,Appl e was concer ned onl y wi t h t he pr i ci ng t hat woul d pr evai l i nt he i Bookst or e and sought onl y to f i x Amazon s pr i ci ng orsol ve t he Amazon i ssue i n i t s own e- bookst or e. I n t hi s andsever al ot her aspect s of Cue s t est i mony, r egr et t abl y, he wasnot cr edi bl e. The document ary r ecor d and t he commerci al cont ext

of t he negot i at i ons l eave r oom f or no ot her concl usi on. Appl e spi t ch t o t he Publ i sher s was - - f r om begi nni ng t o end - - a vi si onf or a new i ndust r y- wi de pr i ce schedul e. Any ot her cour se woul dhave l ef t t he Publ i sher s vul ner abl e t o Amazon s pr i ci ngst r at egi es and woul d have f orced Appl e t o compete on pr i ce.Accor di ngl y, Cue s r epeat ed asser t i on at t r i al t hat hi s sol ef ocus was on t hi nki ng about t he agency deal s and t hei r ef f ect sf r om an Appl e poi nt of vi ew, cannot be t aken at f ace val ue.As a savvy negot i at or he knew how t o pl ace hi msel f i n t hePubl i sher s shoes, under st and t hei r i nt er est s, and appeal t ot hei r concer ns, as he event ual l y admi t t ed t owar d t he end of hi s

t est i mony. Cue r ecogni zed t hat t he Publ i sher s were consumedf i r st and f or emost by a desi r e t o el i mi nat e Amazon s $9. 99 pr i cef or e- books acr oss t he mar ket . Hi s col l eagues, i ncl udi ng Saul ,acknowl edged t hat t hey under st ood at t he t i me t hat Appl e coul dnot sol ve t he Publ i sher s pr obl em wi t h $9. 99 i f t he Publ i sher sl ef t Amazon on whol esal e. Thus, Cue and hi s t eam f ound a way t osol ve t he Amazon pr obl em f or t he Publ i sher s; not j ust as t oAppl e, but i ndust r y- wi de.


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Buoyed by t he r eact i ons of t he t hr ee Publ i sher s t o Appl e s

pr oposal t hat t he ent i r e e- book i ndust r y be conver t ed t o an

agency model - - wi t h hi gher pr i ces f or e- books, a 30% commi ssi on

f or Appl e and no ret ai l pr i ce compet i t i on - Cue s t eam t ur ned

t hei r ener gi es t owar d f l eshi ng out a st r uct ur e f or t hi s

ar r angement . They ent ered t he Chr i st mas br eak wi t h every hope

t hat an i Bookst ore coul d be announced at t he Launch.

G. Appl e s Ter m Sheet : Al l E- t ai l er s t o Agency and Pr i ci ngCaps

Shor t l y af t er t he Chr i st mas hol i days, Cue wr ot e t o each of

t he Publ i sher s t o pr esent Appl e s t er m sheet . On J anuar y 4 and

5, t he f i r st Monday and Tuesday i n t he new year , Cue wr ot e si x

essent i al l y i dent i cal emai l s. 20 Onl y t he i nt r oduct i on var i ed.

For t he thr ee Publ i sher s wi t h whom he had t al ked i n l at e

December , Cue began hi s emai l s wi t h, As we di scussed. For t he

other t hr ee, he began wi t h t he f ol l owi ng comment : Af t er

t al ki ng t o al l t he ot her publ i sher s and seei ng t he over al l book

envi r onment , her e i s what I t hi nk i s t he best appr oach f or

ebooks. 21

I n t hese emai l s, Cue recapped t he key component s of Appl e s

pr oposed agency model . I t i ncl uded t he el i mi nat i on of r et ai l

20 Cue sent emai l s t o Macmi l l an, S&S, Random House, and Hachet t eon J anuary 4. Cue s emai l s t o Pengui n and Harper Col l i ns weresent on J anuary 5.21 For r easons unknown, Cue sent t wo emai l s t o Macmi l l an, onewi t h each gr eet i ng.


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pr i ce compet i t i on and r ai si ng many e- book pr i ces by at l east $3.

Cue wr ote, J ust l i ke t he App St or e, we ar e pr oposi ng a

pr i nci pal - agency model wi t h you, where you woul d be the

pr i nci pal and i Tunes woul d sel l your pr oduct as your agent f or

your account . I n exchange f or act i ng as your agent i Tunes woul d

get a 30% commi ssi on f or each t r ansact i on. For har dback

books t hat r et ai l f or l ess t han $35, t he Publ i sher woul d set a

pr i ce f or an e- book at any pr i ce up t o $12. 99; f or t r ade or

mass- mar ket paper back books, t he pr i ce woul d be capped at $9. 99;

and f or any book t hat r et ai l ed above $35, t he e- book pr i ce woul d

be capped at $14. 99 and i ncrement s of $5 above t hat . Cue added

t hat a r eal i st i c pr i ce f or an e- book woul d be l ess t han 50% of

t he r et ai l pr i ce f or t he har dcover book. He emphasi zed t hat t o

sel l e- books at r eal i st i c pr i ces . . . al l r esel l er s of new

t i t l es need t o be i n agency model . I n cl osi ng, Cue r ei t er at ed

t hat Appl e t hi nk[ s] t hese agency t er ms accompl i sh[ ] al l t he

goal s we bot h have.

I t was as appar ent t o t he Publ i sher s as i t was t o Appl e

t hat Appl e s pr oposal woul d onl y al l ow t he Publ i sher s t o rai se

t he consumer pr i ces f or e- book ver si ons of t hei r key t i t l es

above Amazon s $9. 99 pr i ce poi nt t o t he pr oposed pr i ce caps i f

t hey moved Amazon and t hei r other e- t ai l er s t o agency. Rei dy

i mmedi at el y advi sed her S&S col l eagues t hat she was i n tot al

agr eement t hat t he [ a]gency model shoul d hol d f or al l


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r et ai l ers; t hese woul d become our t er ms. Rei dy s notes on her

copy of Cue s e- mai l capt ur ed t he benef i t s she saw accr ui ng f r om

Appl e s pr oposal . The abi l i t y t o r ai se e- book pr i ces and

pr ot ect t he physi cal book busi ness was f r ont and cent er . Her

not es r ead: Hi gher pr i ce sl ows Ebks/ casual pur chaser / keeps

r et ai l er s/ st ops aut hor s l eavi ng.

I n t he conver sat i ons t hat f ol l owed t he di ssemi nat i on of t he

t er m sheet , Publ i sher s t ol d Appl e t hat t he pr oposed pr i ce caps

wer e t oo l ow. Appl e r ei t er at ed t hat i t woul d not t ol er at e

wi ndowi ng, i t di d not want t o l ose money, and i t di d not want

any pr i ce compet i t i on. I t advocat ed f or an i ndust r y- wi de

adopt i on of t he agency model as t he onl y way t o move t he

whol e market of f 9. 99.

H. Cr eat i on of t he MFN Cl auseOne week af t er i t di st r i but ed t he t er m sheet , Appl e

di st r i but ed a dr af t cont r act . Dur i ng t he i nt er veni ng week,

however , Cue s t hi nki ng about how t o achi eve an i ndust r y- wi de

shi f t t o t he agency model changed. Hi s i n- house counsel had

been worki ng on an al t er nat i ve way t o reach t hat goal t hat was

even mor eef f ect i ve i n pr ot ect i ng Appl e s i nt er est s. Saul

pr op

Apple ebook trial opinion

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