Apple 2.0

Covering the business that Steve Jobs built

The Apple e-book conspiracy: Three days in January

April 11, 2012: 5:07 PM ET

Eddy Cue did the legwork, but the deal had Steve Jobs written all over it

Cue and Jobs. Source: geeksailor.com

After the 56 phone calls in the space of two months, the clandestine meetings in swank Manhattan eateries, the secret e-mails "double erased" to ensure they couldn't be traced, it all boiled down to three days in January 2010, when Eddy Cue, Apple's (AAPL) vice president of Internet services, pushed five of the six leading book publishers for a "final go-no go" decision on an agreement that the Department of Justice has described as a "per se violation" of the Sherman Antitrust Act.

The complaint filed in federal court Wednesday reads like a conspiracy novel, and it reaches its climax on page 25 of 36:

On the evening of Saturday, January 23, 2010, Apple's Cue e-mailed his boss, Steve Jobs, and noted that Peguin USA CEO David Shanks "want[ed] an assurance that he is 1 of 4 before signing...

On January 24, 2010, Hachette signed an e-book distribution agreement with Apple. Over the next two days, Simon & Schuster, Macmillan, Penguin, and HarperCollins all followed suit.

Central to the government's objection to the agreement is a clause that was added in early January. It's a clever -- if legally problematic -- piece of dealmaking that has the feel of something Steve Jobs might dream up:

Apple replaced the express requirement that each publisher adopt the agency model with each of its retailers with an unusual most favored nation ("MFN") pricing provision. That provision was not structured like a standard MFN in favor of a retailer, ensuring Apple that it would receive the best available wholesale price. Nor did the MFN ensure Apple that the Publisher Defendents would not set a higher retail price on the iBookstore than they set on other websites where they controlled retail prices. Instead the MFN here required each publisher to guarantee that it would lower the retail price of each e-book in Apple's iBookstore to match the lowest price offered by any other retailer... That is, instead of an MFN designed to protect Apple's ability to compete, this MFN was designed to protect Apple from having to compete on price at all, while still maintaining Apple's 30 percent margin. (emphasis ours)

A few pages later, Apple's Pete Alcorn describes a meeting with Cue and another Apple executive:

"I think he and Eddy made it at least halfway to changing the industry permanently. ... The interesting insight in the meeting was Eddy's explanation that it doesn't have to be that broad -- any decent MFN forces the model."

I don't usually recommend DOJ complaints as good bedtime reading. This one may be the exception. You can get the pdf here.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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