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Thursday, June 6, 2013

Publishers Tell of Disputes With Apple on E-Book Prices

Publishers Tell of Disputes With Apple on E-Book Prices

Brendan McDermid/Reuters

David Shanks, the chief of Penguin Group USA, left court in Manhattan Tuesday after saying he fought with Apple over e-book pricing.

In an e-mail to her boss, Leslie Moonves, Carolyn K. Reidy, the chief executive of Simon & Schuster, dismissed an Apple executive as a “minion.”

David Shanks, the chief executive of Penguin Group USA, fought with Apple over the e-book pricing it initially proposed.

And Ms. Reidy called an executive at Paramount Pictures to verify Apple’s claim that a 30 percent commission on sales in their iTunes store â€" which she considered too high â€" was standard.

These actions were described in testimony this week as evidence that, rather than illegally conspiring to fix e-book prices, Apple and the publishers were locked in intense negotiations during December 2009 and January 2010. Again and again, Apple lawyers sought to portray the actions as normal business proceedings.

Mr. Shanks and Ms. Reidy echoed that theme, saying the negotiations with Apple were much like those with other retailers, a push-and-pull series of talks that forced them to demand concessions and make some of their own.

Mr. Shanks and Ms. Reidy were the first publishers to take the stand in Federal District Court in Manhattan in the civil antitrust trial stemming from the lawsuit filed last year by the Justice Department.

The publishers, which have all settled with the government, are not on trial. But the proceedings have provided a glimpse into the state of the book business during the period several years ago when Apple decided to enter the e-book market to coincide with the introduction of the iPad.

Lawyers for the Justice Department have argued that the publishers not only used Apple as a conduit to communicate with each other, but also had conversations in which they shared information about Apple and its competitor, Amazon, the dominant force in e-books.

They have repeatedly pressed publishing executives this week on the phone calls and e-mails they exchanged, the private dinners they attended and their conversations at industry events, interactions that, according to the government, are evidence that the publishers were engaged in a conspiracy to raise prices on e-books.

When Apple entered the e-book market, it did so under the so-called agency model, in which publishers set prices for e-books and the retailer takes a 30 percent commission. At the time, publishers sold e-books to other retailers under a wholesale model, where publishers charged retailers close to half the cover price for a book, and the retailers set their own prices.

Amazon, which controlled 90 percent of the e-book market, had set the default price of most new and best-selling books at $9.99, a price that publishers felt undervalued their books and cannibalized hardcover sales. Eager for another big competitor in the e-book market, all six publishers engaged in talks with Apple.

It was during that time, the government said, that the publishers and Apple illegally colluded, eventually forcing Amazon to adopt the agency model as well.

Lawrence Buterman, a lawyer for the Justice Department, questioned Ms. Reidy on Wednesday about her conversation with Brian Murray, the chief executive of HarperCollins, while Mr. Murray was trying to move Amazon to the agency pricing model.

Mr. Buterman also asked her about a conversation with John Sargent, the chief executive of Macmillan, a fellow publisher, during which the two talked about Amazon.

Ms. Reidy shrugged it off. “I made some crack about the personalities at Amazon,” she said.

Mr. Buterman pointed to phone logs that showed several phone calls between Ms. Reidy and David Young, then the chief executive of Hachette. Ms. Reidy said she did not remember all of the calls.

Ms. Reidy, displaying occasional flashes of impatience and sarcasm during several hours of testimony, repeatedly deflected the government’s suggestion that the most-favored-nation clause imposed the agency model on other retailers. The most-favored clause is a provision in the publishers’ contracts with Apple requiring that no other retailer sell e-books for a lower price.

“As a practical matter, the M.F.N. made Simon & Schuster want to move other retailers to an agency model,” Ms. Reidy said, emphasizing the word “want.” “It didn’t force us.”

Later, under questioning by Daniel Floyd, a lawyer for Apple, Ms. Reidy said she initially resisted the most-favored nation clause, but eventually agreed to include it.

Mr. Shanks, testifying on Tuesday, said he was not able to convince Apple to eliminate price caps of $12.99 and $14.99 on its e-books.

Ms. Reidy said she also opposed the price caps, but relented and allowed them to be written into the contract.

The antitrust trial, which is expected to take about three weeks, is presided over by Judge Denise L. Cote.

After the Justice Department filed a lawsuit against Apple and five publishers last year, the Hachette Book Group, Simon & Schuster, and HarperCollins settled immediately; Macmillan and Penguin agreed months later to settle. Penguin and Random House, two of the biggest publishers in the business, are expected to complete a merger in July.

Ms. Reidy provided the most embarrassing moment of the day when an e-mail from her to Mr. Moonves was projected onto a large screen. In the e-mail, Ms. Reidy updated Mr. Moonves, the chief executive of CBS, which owns Simon & Schuster, on her talks with Apple. She referred to an Apple executive as a “minion.”

The executive, Keith Moerer, was seated in the courtroom.

“Sorry, Mr. Moerer,” Judge Cote said, as the onlookers laughed.

“That’s just what I was thinking,” Ms. Reidy said.

A version of this article appeared in print on June 6, 2013, on page B1 of the New York edition with the headline: Publishers Tell of Disputes With Apple on E-Book Prices.