Apple Ready to ‘Take or Leave’ E-Books, Penguin CEO Says

Apple Inc. executives were prepared to abandon plans to enter the e-book business on the eve of the company’s 2010 debut of the iPad, Penguin Group USA Inc. Chief Executive Officer David Shanks testified in the U.S. government’s civil antitrust trial against Apple.

Shanks, called on the second day of the trial in Manhattan federal court, yesterday described his company’s decision to sign a deal known as an agency agreement for Apple to sell Penguin’s electronic books. He said Penguin signed on after initially resisting Apple’s pricing model.

“It was fairly clear that they could take or leave being in the book business,” Shanks said. “If they couldn’t get it on their terms, they weren’t going to take the jump into being in books.”

The Justice Department claims Apple orchestrated a conspiracy among five of the six biggest U.S. publishers to put pressure on Inc., the No. 1 e-book retailer, and raise prices across the e-book market.

Apple claims it did nothing wrong and says it helped consumers by bringing innovation and competition to an e-books market that was dominated by Amazon. Apple Chief Executive Officer Tim Cook has called the case “bizarre,” vowing to fight rather than settle.

Last Defendant

Apple is the last defendant remaining in the case after the government reached settlements with the five publishers: Verlagsgruppe Georg von Holtzbrinck GmbH’s Macmillan unit, CBS Corp.’s Simon & Schuster, Lagardere SCA’s Hachette Book Group, Pearson Plc’s Penguin unit and News Corp.’s HarperCollins. A sixth publisher, Random House Inc., isn’t involved in the U.S. suit.

Shanks, under questioning by Apple’s lawyer, Orin Snyder, testified that the talks with Apple were a “typical negotiation” and that Penguin originally proposed that Apple sign an e-book contract similar to its existing deal with Amazon.

The Penguin CEO said his company considered maintaining different pricing models, with Apple on the agency model and Amazon continuing to buy books at a fixed wholesale price. He said he pressed Seattle-based Amazon to switch to agency after signing an agency agreement with Barnes & Noble Inc.

Under the agency model, publishers set the prices for their e-books, subject to price caps and to an agreement that lets Apple match lower retail prices set by Amazon and other retailers. Under the contract, Apple gets 30 percent of the sale price. The government claims Cupertino, California-based Apple used the provisions to establish an illegal price-fixing agreement among the publishers.

Apple Talks

At the time of the Apple talks, Penguin had a wholesale agreement with Amazon, under which it sold e-books for a fixed price and Amazon sold them for $9.99, at a loss. After it signed the deal with Apple, Penguin signed agency agreements with No. 2 e-book retailer Barnes & Noble and with Amazon. Justice Department lawyers claim e-book prices rose as a result.

An Apple lawyer who negotiated e-book contracts with the publishers testified yesterday that the company was “indifferent” to whether the publishers used an agency pricing model with other retailers.

Kevin Saul, an associate general counsel for Apple, testified that the purpose of a key provision in the contracts was to allow Apple to charge the lowest price on books, not to force Amazon and other competitors to raise prices. The provision, called a “Most Favored Nation” clause, permits Apple to match competitors’ low prices.

The case is U.S. v. Apple Inc., 12-cv-02826, U.S. District Court, Southern District of New York (Manhattan).

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