Bloomberg News

Apple’s Cue Is Key to Defense of E-Book Price-Fixing Case

June 13, 2013

Apple’s Eddie Cue Is Key to Defense of E-Book Price-Fixing Case

The government claims that the Senior Vice President of Internet Services at Apple Inc., Eddie Cue, seen here in 2011, prodded five of the six publishers to raise e-book prices and put pressure on Amazon.com Inc. to abandon its pricing model. Photographer: David Paul Morris/Bloomberg

The government’s antitrust case over e-book pricing has reached a crucial stage as a key Apple Inc. (AAPL:US) executive takes the stand to try to convince a federal judge he didn’t lead an illegal scheme with publishers to fix prices.

Eddy Cue, called “the chief ringleader of the conspiracy” by a Justice Department lawyer, was called to testify today in the Manhattan trial of the government’s lawsuit against Apple.

Cue, 48, is Apple’s central negotiator in dealing with the owners of music, magazines, books, movies and television shows. His role will be highlighted as he testifies about leading talks with the six biggest U.S. publishers in late 2009 and early 2010.

“His testimony is going to be the single most important piece of testimony in this case,” said Ankur Kapoor of Constantine Cannon LLP in New York, an antitrust lawyer who isn’t involved in the case. “He’s alleged to be right in the center of the conspiracy between Apple and the publishers.”

The government claims Cue prodded five of the six publishers to raise e-book prices and put pressure on Amazon.com Inc. (AMZN:US), the No. 1 e-book seller, to abandon its pricing model, in the weeks before Apple entered the electronic book market with the introduction of the iPad.

No Jury

The company denies it conspired to fix prices and is fighting the case, which U.S. District Judge Denise Cote will decide without a jury.

The suit is part of an upsurge in antitrust litigation by the Justice Department, reflecting an Obama administration that has been more aggressive than its predecessors in challenging companies. The government is seeking an order barring Apple from alleged anticompetitive actions, including price fixing, in the market for digital books. The U.S. isn’t asking for money damages.

While Apple co-founder Steve Jobs played a key role in striking deals with entertainment companies, Cue became the company’s main dealmaker after Jobs’s death in 2011.

Last week, Cue was in New York negotiating with music companies to nail down agreements for the debut of the music service he introduced June 10 at Apple’s Worldwide Developers Conference in San Francisco.

“He’s one of Apple’s most important executives,” said Mike McGuire, an analyst with research firm Gartner Inc. “He was the good cop to Steve’s bad cop.”

Real Star

The real star witness would be Jobs, said Kellie Lerner, an antitrust lawyer with the firm Robins, Kaplan, Miller & Ciresi LLP, who isn’t involved in the case. Cue won the role by default, she said. Now, “it really does come down to him,” she said.

Cue, who is from Florida, began working for Cupertino, California-based Apple 24 years ago, after graduating from Duke University. Originally an employee who helped build out Apple’s internal IT system, he developed a rapport with Jobs, who entrusted him with creating the company’s music service after the iPod was introduced in 2001. That started a career of dealing with entertainment companies to integrate their content in Apple’s products.

In a few weeks beginning in late 2009, Cue, tasked with trying to set up an iBookstore in time for the introduction of the iPad, pushed publishers to sign agreements letting it sell digital copies of their books under what’s known as the agency model. Under that model, publishers, and not retailers, set prices for each book, with Apple getting 30 percent.

Five Publishers

Five publishers signed agency contracts with Apple: Verlagsgruppe Georg von Holtzbrinck GmbH’s Macmillan unit, CBS Corp. (CBS:US)’s Simon & Schuster, Lagardere SCA (MMB)’s Hachette Book Group, Pearson Plc (PSON)’s Penguin unit and News Corp.’s HarperCollins. All five settled with the government, avoiding trial.

A sixth publisher, Random House Inc., didn’t sign an agency agreement with Apple and isn’t involved in the U.S. suit.

Lerner, the Robins Kaplan partner, said the settlements leave Apple in a good position to argue the company stood outside of any pricing conspiracy among the publishers.

The government will use Cue’s testimony to try to show Apple orchestrated an agreement among the publishers, its future e-book suppliers, to raise prices.

Proving a series of unilateral agreements between Apple and the publishers isn’t enough for the government to win the case, lawyers said.

“There has to be an agreement,” said Constantine Cannon’s Kapoor. “That’s fundamental.”

The government claims Cue pursued a coordinated strategy with the publishers to move them to the agency model, putting pressure on Seattle-based Amazon, which was offering best-sellers for $9.99, to follow.

Hardcover Sales

Cue knew that the publishers “despised” the $9.99 price, which undercut their hardcover sales, Justice Department lawyer Lawrence Buterman said in his opening statement in the trial.

“They were looking for Apple to solve the problem,” Buterman said. “And as we will show, that is exactly what Apple did.”

Justice Department lawyers will probably ask Cue about a Jan. 14, 2010, e-mail in which they claim Cue presented Jobs with a set of price tiers for e-books.

“I can live with this, as long as they move Amazon to the agent model too for new releases for the first year,” Jobs wrote in a draft response. “If they don’t, I’m not sure we can be competitive…”

Term Sheets

Cue presented the publishers in January 2010 with term sheets that were practically identical, Buterman said.

“Mr. Cue, in that term sheet, made clear that Apple believed moving all resellers to the agency model, which gave the publishers the ability to set the higher prices that he knew they wanted or what he referred to as ‘realistic pricing,’ accomplished all the goals that they both had,” Buterman said.

The government will try to show that Cue kept the publishers informed about what the others had told Apple and what they were planning to do.

Last week Buterman questioned Carolyn Reidy of Simon & Schuster, one of several publishing CEOs who have testified in the trial, about an e-mail she sent Cue on Jan. 21, 2010.

“I will also look forward to an update on your progress in herding us cats,” Reidy told Cue. Later in the day, Reidy called Cue and talked with him for about 11 minutes, according to the government.

Coordinating Actions

The Justice Department claims the publishers were coordinating their actions through Cue. Reidy said she was just trying to learn whether Apple had signed agreements with enough publishers to allow it to go forward with the iBookstore.

Apple says Cue’s negotiations with e-book publishers were contentious and aimed at getting the best terms for Apple.

“He’s tough, but he’s honest and he gets it. There’s no BS about him,” said Stephen White, president of Sony Corp.’s Gracenote, the maker of song-identification software that is used by Apple.

Cue’s responsibilities have expanded beyond entertainment offerings and iTunes. He’s also in charge of Apple’s App Store, iCloud Web-storage service and Siri voice recognition software. In addition, he took over the company’s mapping effort after a botched debut last year.

The larger role has also included bigger pay. In 2011, Cue was given 200,000 restricted stock units that vest over the coming years. Based on Apple’s June 12 stock price of $432.19, those stock grants are worth $86.4 million.

A lover of cars, Cue joined the board of Ferrari SpA last year. He’s also an avid basketball fan, attending Duke Blue Devil games in Durham, North Carolina, and Golden State Warriors games in Oakland, California.

‘Guy’s Guy’

“He’s a guy’s guy,” said White, who has known Cue for years. “You can talk to him about sports, you can talk to him about cars. He’s naturally one of those guys you want to follow. He’s got a great personality and a great sense of humor.”

Apple’s lead lawyer, Orin Snyder, told Cote in his opening statement that Cue applied to the e-book negotiations the same model he’d used to sign up suppliers for the iTunes and applications stores.

“The fact that Apple acted, in every respect that the government wants to cast a sinister light on, in its legitimate and lawful business interests is proof that Apple did not conspire in the first place,” Snyder said.

‘Indifferent’ Company

Cue, new to the e-books market, was concerned only with negotiating the best deal for Apple, according to Snyder. The company was “indifferent” to arrangements the publishers had with other retailers, including Amazon, according to Apple.

Apple says it helped consumers by bringing innovation and competition to the e-books market that was dominated by Amazon.

“The e-book case to me is bizarre,” Tim Cook, Apple’s CEO, said at an industry conference last month. “We’ve done nothing wrong there and so we’re taking a very principled position on this. And so we’re going to fight.”

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

To contact the reporters on this story: Bob Van Voris in Manhattan federal court at rvanvoris@bloomberg.net; Adam Satariano in San Francisco at asatariano1@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net; Tom Giles at tgiles5@bloomberg.net


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