Just days after Apple (AAPL) introduced the iPad and opened an e-bookstore, the biggest player in the e-book market, Amazon, changed the way it sold digital titles. Steve Jobs took out his iPhone and shot off an email to the Apple executive who had negotiated deals with the publishers.
"Wow, we have really lit the fuse on a powder keg," Jobs wrote in the email dated Jan. 30, 2010, to Eddy Cue, Apple's senior vice president of Internet software and services.
The email was brought up as evidence during the second half of Cue's testimony in a Manhattan courtroom on Monday, where much of the discussion focused on whether Apple intended to help the publishers raise Amazon's prices.
Cue testified Monday that Jobs' email was not a memo congratulating him about how Apple's entry into the e-book market affected Amazon, causing it to switch to a business model called agency pricing, where the publishers, not the retailer, set the price of the books. (In the case of many new releases and best-sellers, the publishers chose to raise prices.) Instead, Cue said, Jobs was remarking on the company's ability to "cause ripples" in the e-book industry, which was then largely dominated by Amazon.
While Cue conceded that prices of some e-book prices went up as a result of agency pricing, he noted that many titles might not have become available in any digital store at all if Apple had not introduced agency pricing to the market. He said he learned from his meetings with publishers that they were unhappy with Amazon's uniform $9.99 pricing for e-books and that they were planning to use on new releases a tactic known as windowing - delaying the release of a title's e-book until after the more expensive hardcover had been in stores for a while.
Cue testified that both he and Jobs believed that "withholding books is a disaster for any bookstore."
The Justice Department was not persuaded by this argument. Lawrence Buterman, a Justice Department lawyer, asked Cue whether he was aware that only 37 e-books had ever been windowed. Cue said he had no data on the number of e-books that were windowed, but he argued that it was an irrelevant point because the issue was that the publishers could delay sales of e-books.
"The number doesn't matter," Cue said. "What matters is which books. Thirty-seven could be a huge number if it's the right books."
In its antitrust case brought a year ago, the federal government is trying to cast Apple as the ringmaster that conspired with five big book publishers to raise e-book prices. The publishers have all settled their cases.
On Monday, the Justice Department's lawyers homed in on a condition in Apple's contracts with the publishers: the "most favored nation" clause, which required publishers to allow Apple to sell e-books at the same price as the books would be sold in any other store. Apple has said this clause existed to guarantee that Apple customers got the lowest e-book prices. But Buterman argued that it defeated Amazon's ability to compete on price, and that it left Amazon with no choice but to switch to the agency model while allowing the publishers to raise prices.
Cue said he disagreed. He noted that Amazon had 90 percent of the e-book market before Apple entered the game, so it should have had other options.
"Amazon could have negotiated a better deal," he said. "They had a lot more power."
Lawyers for Apple and the government spent much of the hearing debating whether the emails exchanged between Apple executives and publishers illustrated Apple's intent to help the publishers force Amazon's hand. In one email sent to Jobs, Cue was reviewing his meeting with the publishers, saying they were interested in solving the "Amazon issue."
Cue said he was referring to the publishers' ability to price books above Amazon's uniform price of $9.99 in Apple's iBookstore. Apple had proposed price caps of $12.99 to $14.99 for new releases. But he said this did not refer to enabling the publishers to force Amazon to raise prices, too.