The US government's price-fixing lawsuit against Apple goes to trial next month in New York. Ahead of its court date, the US released emails that purport to show Apple was the "ringleader" in a scheme to set artificially high ebook prices with some of the largest American publishers, which have already settled the case.
The emails have mostly been viewed in the context of the lawsuit, but they also provide an extraordinary view of high-stakes negotiation between the leaders of two powerful firms, Apple and News Corp. They start far apart, but over the course of five days, Apple's then-CEO Steve Jobs successfully pulls the son of News Corp. CEO Rupert Murdoch over to his side.
Jobs was a famously hard-nosed negotiator who won these kinds of battles all the time. Before book publishers, there was the movie industry. And before that, music record labels. But most of those negotiations were hidden from view. What follows are the emails released last week along with some context; spelling and grammar have been preserved from the originals.
News Corp.'s Opening Move
It was a Friday morning, January 22, 2010. Apple was preparing to release its newest product, a long-rumored tablet computer, the following week. Part of the iPad's appeal was supposed to be the vast array of media that could be consumed on it, but one of the largest American publishers, HarperCollins, was holding out from signing a deal to sell its ebooks in Apple's iTunes store.
Those were the stakes as Eddy Cue, Apple's head of iTunes and the App Store, visited executives of HarperCollins and its parent company, News Corp. The substance of that meeting was conveyed in an email sent to Cue later that day by Brian Murray, the CEO of HarperCollins. It detailed the publisher's opening bid in the negotiation, with five days remaining until the iPad's unveiling.
Thanks for coming in again this morning. We've talked over the proposal and I want to make sure that you have a summary of the deal that HarperCollins would be willing to do in your timeframe.
1. Pricing: We need flexibility to price on a title by title basis outside the prescribed tiers in the contract. We will use our best efforts to meet the tiers we discussed.
2. MFN ["most favored nation" status]: In the event that HarperCollins and Apple disagree on a consumer price for a title, HarperCollins needs the ability to make that title available through other agents who support the higher price.
3. Commissions: We need a lower commission on new releases for the economics to work for us and our authors. We believe a 30% commission will lead to more authors asking for ebooks to be delayed a result that will not work for Apple or HarperCollins.
4. The new release window: We need to have flexibility on the agency window. We believe this window should be 6 months rather than 12 months in the event that one or more large retailers do not move to an agency model.
Leslie will be sending Kevin a contract that reflects these points in the event you wish to move forward on these terms.
Those terms were never going to fly with Apple, which had successfully signed deals with HarperCollins's rivals, like Penguin (a division of Pearson) and Simon & Schuster (part of Viacom). Those deals would allow Apple to set prices for new ebooks at $12.99--three dollars higher than the typical rate at that time on Amazon--and take a 30% cut of each sale.
But HarperCollins wanted the freedom to set its own prices and worried that $12.99 per ebook would hurt its sales on the new iPad as well as the Kindle. It also didn't want to give up 30%. To back up its position, James Murdoch, a high-ranking News Corp. executive, forwarded Murray's email to Apple's then-CEO Steve Jobs, and included the following note. It was still Friday.
Thanks for your call earlier today, and for the time last week.
I spoke to Brian Murray and Jon Miller [then the head of digital media at News Corp.]--and Brian is sending a note to Eddy today. I thin I have a handle on this now. In short--we we would like to be able to get something done with Apple--but there are legitimate concerns.
The economics are simple enough. [Amazon] Kindle pays us a wholesale price of $13 and sells it for 9.99. An author gets $4.20 on the sale of a hardcover and $3.30 on the sale of the e-book on the Kindle.
[A portion of this email was redacted by the court.]
Basically--the entire hypothetical benefit of a book without raw materials and distribution cost accrues to Apple, not to the publisher or to the creator of the work.
The other big issue is one of holdbacks. If we can't agree on the fair price for a book, your team's proposal restricts us from making that book available elsewhere, even at a higher price. This is just a bridge too far for us.
Also, we are worried about setting prices to high--lots of ebooks are $9.99. A new release window with a lower commission (say 10[%]) for the first six months would enable us to proce much more kenly for Apple customers. We'd like to da that.
More on this below in Brian's note to Eddy. We outline a deal we can do.
Feel free to call or write anytime over the weekend to discuss if you like.
I am in the UK (so eight hours ahead of CA). My home number is [redacted]. I check the email regularly.
Steve, make no mistake that across the board (TV, Studios, Books, and Newspapers) we would much rather be working with apple than not. But we, and our partners who produce, write, edit, and otherwise make all this with us, have views on fair pricing, and care a lot about our future flexibility. I hope we can figure out a way, if not now and in time for this launch of yours, then maybe in the future.
Jobs Digs In