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On day two of the U.S. Department of Justice's antirust suit against Apple, Penguin Books CEO David Shanks took the stand to offer testimony regarding the Cupertino company's role in an alleged e-book price fixing scheme.
According to in-court reports from Reuters, Shanks testified on Tuesday that Apple inserted a provision in its e-book contract with Penguin which forced the publisher to modify its existing agreements with other retailers, including market leader Amazon.
The stipulation Shanks referred to is Apple's most favored nations clause, which is part of the so-called "agency model" that holds a publisher can set content pricing as long as it doesn't sell said content to another retailer for less.
"The fact that the parity clause was in the contract more or less made it a given we'd have to be at agency," Shanks said in a previously recorded deposition that was played in court.
In his testimony, Shanks added that Apple's clause was "certainly a factor" in moving rivals over the agency model where publishers have control over pricing. Retailers like Amazon use the wholesale model where content owners sell bulk rights to retailers, which can resell the e-books at or below cost.
The most favored nations system is one of the DOJ's targets in its suit, as it claims consumers were hurt by fixed prices resulting from collusion between Apple and five major publishing houses. All the accused publishers, including HarperCollins, Simon & Schuster, Hachette Book Group and Macmillan, settled out of court.
Penguin was the last of the five publishers to settle with the Justice Department, doing so in December 2012. The firm also paid a $75 million settlement to 33 state attorneys general for a parallel suit in May.
While the first part of Shanks' testimony appeared to strengthen the government's case, upon cross-examination sentiment shifted toward Apple. The CEO admitted that there was concern over the low content pricing from Amazon, which at the time was one of Penguin's biggest customers and accounted for some 90 percent of its e-book sales. This suggests, as Apple had argued, the negotiations were tough, making collusion a less likely option.
Penguin CEO David Shanks admitted there was concern over Amazon's wholesale pricing model.
Under Amazon's wholesale model, however, the Internet retail giant was selling new hardcovers at prices far from the average normally fetched for first run titles. Publishers routinely release hardcover versions ahead of cheaper paperbacks in a profit-making practice called "windowing."
"What transpired was by having e-books now at $9.99, it was cannibalizing hardcover editions, which sold on average at $26," he said.
Later, Shanks said Penguin "strongly resisted" the most favored nations model as it feared Apple would not only match Amazon's low prices, but also require its usual iTunes commission. In the end, however, Penguin inked a deal after seeing the other major publishers hop on board.
Once the most favored nations system was established, with bookseller Barnes & Nobel also adopting the model, Penguin tried to get Amazon to move to it as well. According to Shanks, the market leader didn't take the news well.
"They yelled and screamed and threatened," he said. "It was a very unpleasant meeting."
Shanks was the first executive from the five publishing houses to testify in court. Also scheduled to take the stand during the three-week trial is Apple's vice president of Internet Software and Services Eddy Cue.