Through it all, the emperor’s ghost still hovered. Iconic photos of Jobs—introducing the Macintosh, showing off the MacBook Air—now hung on the walls of Apple’s executive briefing center. Day after day, he stared out, silently judging Cook and his team as they battled their competitors, their own flaws, and the inevitability of decline. It didn’t matter that they had inherited a host of problems Jobs himself had allowed to fester. It gained them nothing to point out that their fallen leader, lauded around the globe for his incandescent vision, had somehow overlooked the crises that threatened his creation. His specter was floating somewhere beyond reproach, beyond accountability, above the tangle of human fallibility.
His successors were stuck here on earth.
10
Thermonuclear
The two industrial superpowers stood at the brink of global conflict. For months, their leaders and top lawyers flew back and forth across the Pacific, soaring above the clouds as they coldly appraised each other’s defenses and calculated the odds of whether it was better to avert the war that loomed between them or to let that war commence. The stakes were unimaginably high: billions of dollars and the question of who would dominate the future of human communication.
In mid-2010, Jobs and Cook had met with Samsung’s president, Lee Jae Yong, at Apple’s Cupertino offices. The Korean electronics company had just unveiled a smartphone that looked strikingly like the iPhone 3GS with a big touchscreen and a metal frame. Even more alarming, the user interface of the device was nearly identical—down to the design of the calendar, clock, and notes applications. The home screen was filled with similar-looking square icons. The Apple executives warned Lee. He needed to stop copying their products.
Over the next six months, the two titans entered into a dance of negotiation and modulated aggression as they held a series of peace talks in an effort to avert a protracted legal battle. Soon after the first summit, Apple’s general counsel and lead patent attorney traveled to Korea to formally complain. Their issue with Samsung was twofold. Apple claimed that the Galaxy S phone and its packaging looked too much like the iPhone, and Samsung was using Google’s Android operating system, which incorporated Apple’s patented technology without its permission. In a sixty-seven-page report, the iPhone maker detailed examples of how they claimed the Galaxy phone was specifically infringing on its patents. As a solution, the company demanded that Samsung change some of the designs and license Apple’s technology for others.
Samsung was unsympathetic. They refused to acknowledge the similarities of design and counter-accused Apple of violating its intellectual property. To settle the dispute, the manufacturer proposed a cross-licensing agreement in which both parties would agree to let the other be.
A few more fruitless meetings followed. After Samsung unveiled its tablet device, Galaxy Tab, at a European trade show in September, Apple laid out a proposal to license some of its patents for thirty dollars per smartphone and forty dollars per tablet with a 20 percent discount for cross-licensing Samsung’s portfolio back to Apple. For 2010, that amounted to about $250 million.
Samsung spurned the offer. By the time they next met in Korea, Samsung had reworked the math in its favor. They asserted that Apple owed Samsung money, not the other way around. In the discussions, Samsung’s legal team sent mixed messages. Officially they refused to budge on their position, but in an informal conversation over lunch, they had indicated a willingness to negotiate. For months Apple had held out hope that the Samsung camp would ultimately be willing to work out an acceptable deal that would allow them to avoid a courtroom battle.
Any possibility of that outcome ended when Samsung unveiled the Galaxy Tab 10.1 the following February. The tablet device was more like the iPad, not less. Samsung seemed inclined to edge as close to the line as it could unless forced to retreat.
The war was on.
As a newly crowned titan, now officially the most valuable technology company in the world, Apple was embroiled in legal battles around the globe.
In the past, when it was smaller, Apple could operate under the radar and blindside industries with groundbreaking products. The formula used to be straightforward—all the company needed to do was focus on making the best products they could. But that was no longer enough. With every success, Apple found it harder to tap into new areas of unexplored growth and innovation. Technologies were converging, which meant that its competition was increasing. Now in addition to computer, software, and music device makers, Apple’s rivals included mobile phone makers and Internet giants like Google and Facebook.
At a time when it needed to use every advantage to stay ahead, Apple was more limited in what it could do than ever before. The company was an eight-hundred-pound gorilla now. Some of its most aggressive tactics were no longer acceptable.
A case in point was Apple’s effort to enter the digital book business—an industry the company had once ignored. Back in January 2008, Jobs had dismissed publishing.
“It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore,” he had said. “Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”
As was often the case, Jobs reversed his position when confronted with new possibilities. Reading was one of the iPad’s obvious uses. He wasn’t about to hand the e-book business over to Amazon or Barnes & Noble, so he needed to create a store. The problem: Apple liked to dictate terms. But unlike when it first opened the iTunes store, this time the company was entering an already established market. The business model already in place was largely similar to the way brick-and-mortar bookstores worked. The retailer bought the books wholesale and then set prices at its discretion. Two years after Amazon had come out with its Kindle reader, the online store was dominating the industry with a pricing strategy so low that it was preventing other booksellers from competing with it. In a bid to gain market share in both e-books and e-readers, the online giant was buying newly released books from the publishers for about $13 and selling many of them for $9.99. That was unacceptable to Apple, which was used to taking a healthy 30 percent cut of revenues.
To build a more lucrative business, Apple needed the cooperation of the publishers to change the equation. The Big Six—Hachette Book Group, HarperCollins, Macmillan, Penguin Group, Simon & Schuster, and Random House—were willing to listen because they had become increasingly worried about the damage Amazon was inflicting on the market. Amazon was selling digital versions of hardback books that cost twenty-five dollars or more for 60 percent less even though the content was the same. If the low price point became too entrenched, e-books might completely displace actual books, and the impact could be devastating to an industry already operating on thin margins and struggling to survive.
The solution that Apple proposed was this: Apple would give publishers the ability to set prices in its iBookstore below caps, ranging for most books from $12.99 to $16.99, and in return publishers would give Apple a 30 percent commission. They referred to it as the “agency model.” It looked like a win-win for Apple and the publishers.
“Yes, the customer pays a little more,” Apple had told publishers according to an account by Jobs in Isaacson’s biography, “but that’s what you want anyway.”
The agreement’s pièce de résistance was a most-favored-nation clause that Apple included to further protect itself. It guaranteed that the publisher would lower the retail price of a book in Apple’s bookstore to match the lowest price offered by any other retailer. Jobs proudly described it as an “aikido move.”
To cut the deals, Jobs dispatched Eddy Cue as his point man. The executive took three separate trips to New York on top of numerous phone calls and emails to pitch the publishers and reassure them that each would be given the same deal. Jobs himself brokered some of the deal making.
“We simply don’t think the e-book market can be successful with pricing higher than $12.99 or $
14.99,” Jobs wrote James Murdoch of News Corporation, HarperCollins’s parent company. “Heck, Amazon is selling these books at $9.99, and who knows maybe they are right and we will fail even at $12.99. But we’re willing to try at the prices we proposed.”
Jobs wrote that HarperCollins had a choice to “throw in with Apple,” “keep going with Amazon at $9.99,” or “hold back your books from Amazon.”
He closed by writing, “Maybe I’m missing something, but I don’t see any other alternatives. Do you?”
In the midst of these secret negotiations, Apple was handed an unexpected boost. Publishers learned that Amazon was meeting with prominent authors and literary agents in New York to discuss Amazon Publishing’s new digital self-publishing program. In the meetings Amazon was careful to point out that it was not interested in competing with publishers. Its interest was in titles for which authors had retained e-publishing rights, promising royalties of 50 to 70 percent. That was more than double what publishers typically offered. The announcement probably tipped the scale. Not only was Amazon devaluing the publishers’ books, but they also now appeared poised to cut them out of the business altogether. In the following days, five of the six biggest publishers agreed to Apple’s proposal. Penguin CEO David Shanks was particularly angry at Amazon.
“I am now more convinced that we need a viable alternative to Amazon or this nonsense will continue and get much worse,” he concluded. The lone holdout was Random House, which was unconvinced that Apple’s proposed agreement would be beneficial.
Apple introduced its iBookstore to the public at the iPad launch in January 2010. By April 2010, Amazon had accepted the agency model. But the publisher’s victory would be short-lived as their actions attracted the scrutiny of regulators. Within a few months of the launch, the Texas attorney general made inquiries into Apple’s relationship with the publishers. In August, Connecticut’s attorney general disclosed a preliminary review of the agency pricing agreement. The U.S. Department of Justice, conducting an inquiry into Apple’s music and app businesses, began looking into the publishing agreements. A year after that, a consumer rights firm filed a class-action suit against Apple and the publishers for allegedly arranging an industry-wide price increase. A probe by the European Union commission and more than a dozen other class-action suits followed.
On April 11, 2012, the Department of Justice and thirty-three states and territories sued Apple and the five publishers that had committed to the terms at the onset.
To the government, Apple’s agency model was a simple case of price-fixing. The Justice Department’s thirty-six-page complaint detailed what it alleged was evidence of collusion in emails, memos, and phone records. The publishing CEOs had placed at least fifty-six phone calls to each other when the agreement was being negotiated.
Hachette, Simon & Schuster, and HarperCollins, who had been negotiating a possible deal with the DOJ for some weeks, settled right away with the Justice Department and the states. Macmillan and the Penguin Group resisted at first but later settled. None of the five publishers admitted to having had engaged in any unlawful conduct. Apple, as usual, was defiant. “The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry,” Apple proclaimed in a statement. In court filings, the company argued that it was a new entrant in the business and therefore had no clout to engineer the scheme the government alleged. A trial was scheduled for June 2013.
This behavior—audaciously seizing new territory, then defending that territory with an all-or-nothing defense—had long been a classic pattern for Apple. But in the e-book case, where its aggression was chronicled so thoroughly in the flurry of emails, the company’s insistence on its innocence was befuddling. The expedient choice would have been to settle and make the heat go away as quickly as possible, especially since the Justice Department was going to let the company off fairly easily. All Apple probably would have to do was to give up the agency agreement for two years and the most-favored-nation clause for five years just as the publishers had. The class-action lawsuits were a problem, but any payment would be tiny compared to the billions in cash that it had.
Convinced that its motives were purer and its behavior above any challenge, Apple spurned the possibility of a settlement. The company wasn’t about to concede that it had been caught red-handed. Instead it painted a bull’s-eye on its back.
“Their behavior in the eBooks has made them into a bigger target,” observed a former Justice Department official involved in the case. “It was just a slap on the wrist, but they made themselves into a headline.”
As Apple plotted to remake digital publishing, it was also coming under attack from rivals in the mobile industry, who wanted a piece of the iPhone’s success.
One of the first to target Apple was Nokia. The once-dominant Finnish mobile phone maker had been a pioneer in the industry but was now struggling. The company had originally developed many of the core technologies and had led the global mobile market in the late 1990s and early 2000s with its iconic candy-bar-shaped phones. But it was losing ground rapidly to BlackBerrys and iPhones. Nokia’s executives were determined to make sure that the company was at least paid licensing fees on technologies for which it owned the patent rights.
On October 22, 2009, Nokia sued Apple for infringing ten of its patents related to the way cell phones connected to wireless networks.
“Apple is attempting to get a free ride on the back of Nokia’s innovation,” charged Nokia’s lead intellectual property counsel.
Seven weeks later Apple fired back by countersuing Nokia claiming that the company was infringing thirteen of its patents. “Other companies must compete with us by inventing their own technologies, not just by stealing ours,” said Apple’s general counsel.
At the center of the dispute was a complex and imperfect patent system. The laws governing patents differed by country, and enforcement ended at the border. In the United States, patent holders were granted rights to their inventions for up to twenty years, based on an intricate calculation that took into account factors such as application type, filing date, and even timely payment of maintenance fees. For the duration of the patent, owners license its rights or prevent competitors from selling similar products. The intent was simple: to provide an incentive for innovation.
But with the dawn of the computer age, technological innovations had become increasingly complex and the lines between what was and was not subject to legal protection had blurred. Traditionally patents covered specific technologies, not abstract concepts. In software, however, the line between concept and implementation was murkier. U.S. patent law allowed the patenting of broad concepts, including fundamental mathematic equations.
As a result, companies filed applications for anything—hardware or software—that could conceivably be considered an invention, and products came to be covered by a thicket of patents. Companies could use those patents to force a supposed violator to pay an exorbitant licensing fee or prevent them from incorporating the patented technology into their products. That led to an explosion of even more patent applications as companies felt the need to arm themselves just so they could run their businesses without fear of attack. Instead of promoting innovation, the system stifled it.
The biggest companies had dealt with the situation by amassing a huge war chest of patents. That way, if they violated someone else’s patents, then the other side was likely to have violated some of theirs. They could reach a détente in the form of a reasonable licensing fee or a cross-licensing agreement. This was a big part of the reason Google, which held relatively fewer patents than others, acquired Motorola in 2011 for $13 billion.
The problem was that companies were increasingly less inclined to agree on the terms of a deal as both sides sought to gain the upper hand. The more competitive the industry, the higher the stakes.
Between Apple and Nokia, Nokia had a clear advantage in mobile technology, with an arsenal of patents ama
ssed over decades. Its portfolio was five times as big as Apple’s, which had only started making phones a few years earlier. Nokia wasn’t looking to drive Apple out of business. It just wanted Apple to pay for technology that it had developed just like the other mobile phone companies. But Apple wasn’t a company that gave in without a fight.
That would change as Apple found itself in more battles against other adversaries. The conflicts that awaited would turn out to be so epic that they would make Apple’s dispute with Nokia look like a skirmish. The enemy was Android.
The philosophy behind Android was the exact opposite of the iPhone, which was tightly controlled in its entirety by Apple. Google, which developed the mobile operating system, was a big believer in open-source software, a category of software where the source code—the software’s underlying blueprints—was made freely available to anyone. As such, the company offered Android without charge. Google required device manufacturers to comply with certain standards if they wanted to use the Android trademark and access proprietary applications, but the companies were given the freedom to modify the software to fit their needs. This made it relatively easy for manufacturers to offer touchscreen mobile devices.
Apple had known about Android long before it was announced, but Jobs hadn’t taken it seriously at first. When the operating system was unveiled in late 2007, the announcement had hardly made a stir as Google’s executives focused more on the consortium around its software rather than the software itself. Taiwanese mobile phone company HTC had committed to making the first phone, but Google had to pay the company millions as an incentive. Google’s CEO Eric Schmidt as well as the founders, Sergey Brin and Larry Page, also played down Android to Jobs, reassuring him that they would not be competing with the iPhone.
“I believe in my relationship with these guys that they’re telling me the truth about what is going on,” Jobs had told a colleague.
Haunted Empire: Apple After Steve Jobs Page 19