Apple’s Eddy Cue has spoken out for the first time about the iBooks price-fixing scandal. This month, the company will appear at a federal appeals court in the US to fight a lower court ruling that Apple conspired to fix prices in the e-book market in order to compete against Amazon.
The iBooks chief tells Fortune that Apple continues to battle the government’s decision on “principle” — the plan is to overturn the ruling that found the company, alongside its book publisher partners, liable for a price-fixing conspiracy.
Basically, before iBooks came along on the iPad, Amazon dominated the e-book business almost completely, and was selling books very cheaply. Those cheap online books were endangering the more profitable paper book market — something publishers were keen to avoid. So the publishers struck a deal with Apple: they would offer the e-books on the iPad and agree to an arrangement that charged consumers a higher price. Consumers would get a competing choice for e-books, and publishers would have leverage to negotiate better prices with both Apple and Amazon.
But a federal court judge ruled that Apple’s pricing agreements with the publishers amounted to an illegal price-fixing agreement — and that is what Cue and Apple are hoping to overturn.
There’s a lot at stake: Apple settled the case at the trial for $US840 million. For the appeal, Apple agreed to a “conditional settlement”, which means it will get back $US450 million in damages and attorney fees if it wins; a loss, while without any further monetary affliction, would maintain the smear on its reputation.
Cue explains that “we feel we have to fight for the truth”, and adds CEO Tim Cook is fully behind contesting the ruling. “It’s just not right”, Cook apparently states.
Somewhat remarkably, Cue says “he’d do it all again”, but adds simply: “I’d just take better notes”. He honestly believes, it appears, that Apple did nothing wrong.
The scandal boils down to a simple change in the way Apple and book publishers operate. Cue led negotiations with five publishers — Penguin, HarperCollins, Simon & Schuster, Macmillan, and Hachette — to switch from what’s known as a “wholesale model” to “agency pricing”.
Wholesale is how Amazon works. It means the company has the power and charges what it wants. Usually, it means books are “cheap”. But Apple’s new agency format prevented content owners from being able to sell the same titles at lower prices elsewhere — that is, outside iBooks.
It meant Steve Jobs’ Apple, under the management of Cue, created an iBooks store for the iPad market that set its prices 50% higher than the $US9.99 level Amazon was charging — with those well-known publishers fully involved in the deal. It was all discussed by Cue at secret New York dinners with those publishers.
As Business Insider explained at the time, it’s a huge decision for a highly lucrative market. E-book downloads were worth $US3 billion in 2012.
In the interview, Cue notes that publishers were open about raising book prices because they felt the wholesale model meant texts were sold too cheaply; he argues some book prices actually went up as a result of iBooks because it meant there was more competition with Amazon and its ebook dominance.
“Is it a fact that certain book prices went up? Yes. If you want to convict us on that, then we’re guilty. I knew some prices were going to go up, but hell, the whole world knew it,” Cue adds. “At the same time, other prices went down too, because now there was competition in the market.”
According to a law professor at the University of Iowa, Herbert Hovenkamp, “Apple has an uphill battle”. “There was lots of evidence in the record,” he tells Fortune.
But apparently it’s not entirely clear cut — and Apple does have a chance overturning the verdict.
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.
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