updated 09:39 pm EDT, Tue June 4, 2013
Shanks: Apple's entry benefited industry, Penguin did not collude
Testimony on the second day of Apple's trial as a defendent against the US Department of Justice on allegations of conspiracy to raise book prices appears to have gone reasonably well for the Cupertino-based electronics giant, with some mixed but friendly testimony from Penguin Group USA CEO David Shanks. Though he admitted that it was "irrational enthusiasm" for the potential 80-100 million strong customer base Apple had at the time that led Penguin to accede to many of Apple's terms during negotiations over its contract, he also defended some aspects of Apple's role.
Penguin, the last of the big four publishers to settle with the DOJ over its use of the "agency model" of e-book pricing (where publishers dictate retail prices to resellers, who get a percentage of the price) and the least repentant, was unhappy with Amazon's predatory undercutting of the suggested retail price of its e-books, but -- crucially to Apple's case -- did not attempt to force Amazon (which then had a 90-plus percent monopoly on e-book sales) to force Amazon to charge more until Barnes & Noble entered the market.
Apple, which entered the market shortly before B&N, had already done the legwork in convincing publishers that agency pricing was the most sustainable model for e-books, even though it would result in short-term price increases on the newest titles. Shanks referred to the bookselling market as "a fairly delicate eco-system" where the publishers were trying to maintain a balance in which "everybody makes a profit: the author, the publisher and the reseller." Amazon's pricing, he said, devalued e-books in the eyes of the publishers and threatened not just competition in the e-book market, but also the stability of physical book resellers. Best-sellers in print tended to sell for around $26, a far cry from the $10 Amazon priced e-book versions.
Under questioning by Justice Department lawyer Mark Ryan, Shanks said that Penguin had tried to maintain a pricing agreement with Amazon that would have enabled the online storefront to continue selling e-books at a loss, but was forced to change by Apple and B&N's contracts. If Amazon hadn't been forced to change its "wholesale" model, the publisher would have risked losing money. He added that Apple had actually insisted on limits to prices for e-books at a time when most publishers believed that prices could be steadily increased as consumers stopped buying printed books, which would have proven a net benefit to consumers over the long term.
Since Apple's entry into the market, e-book sales have increased, while overall prices have actually gone down. New releases, however, while stable in price since 2010, are a few dollars higher than they were when Amazon was selling all e-books at a loss, presumably to shore up its Kindle e-book reader business. In response to a question from Judge Denise Cote, Shanks admitted that Penguin feared retaliation from Amazon for its dealings with Apple. He said negotiations with Amazon were "unpleasant" with lots of "yelling, screaming and threatening." Amazon, cowed by the publishers in 2010, has since largely abandoned the "predatory pricing" approach -- and yet continues to dominate the e-book industry, but to a somewhat lesser degree than it did as a near-monopoly.
For the most part, however, Shanks' testimony -- particularly when questioned by Apple lawyer Orin Snyder -- supported Apple. Though he admitted during prosecution questioning that an exclusive "Winnie the Pooh" e-book in full color -- an exclusive given to Apple where other editions were only in black-and-white, and still available to new iBookstore customers for free -- looked "extremely beautiful" by comparison to the Amazon version and thus might entice customers away from Amazon, he sided with Apple's support of the agency model as one that would sustain the present publishing industry. He added that because of Apple's entry into the market, the e-book industry is now "established and more predictable," and that Penguin can now better project its sales of hardbacks, paperbacks and e-books, in part because it is now clear that the number of printed books is decreasing.
Shanks told the judge that Penguin's negotiations with Apple were not unlike typical negotiations he had conducted in his 35 years in the book publishing industry. He said that Penguin had decided that it would not agree to Apple's deal to price new e-book releases at $13-$15 unless at least three of what was then the six largest publishers joined the Apple iBookstore as well. He said that it was not a collusion on pricing, but more of a concern that consumers would be disappointed if they did not "feel they were viewing the whole gamut" of available books.
Penguin eventually paid $75 million to settle all claims against it, and terminated its original contract with Apple. The company continues to sell books through all the major e-bookstores, including the iBookstore, and its restriction on re-adopting the "agency model" is only curtailed for a period of two years.