Apple contended that it had not known the extent of the publishers’ collusion with each other. They had been discussing strategies to deal with Amazon’s cut-rate pricing even before Apple had decided to start the iBookstore. The company also asserted that Apple couldn’t be accused of violating antitrust laws because it was a latecomer to the industry, not a dominant player. It was simply trying to come up with a viable business model that would introduce competition in the market.
The fate of the case had the potential to impact not only Apple and Amazon, but also consumers, booksellers, authors, and literary agents. When the first three publishers had settled, the court received 868 comments on the proposed final judgment from individuals, companies, and industry groups, including a consumer activist group. Among them was an amicus brief from a lawyer in the form of a five-page comic strip that argued against the settlement. More than 90 percent of the comments had been negative, critical of Amazon’s cut-rate pricing and full of praise for the entry of new competitors as a result of the agency agreements.
Ten days before the trial was set to open in New York, attorneys from both sides met with U.S. District Judge Denise Cote, a veteran judge and former prosecutor with a flair for literary references.
Cote was familiar with the case because she had approved the settlement agreements. In September 2012, at the time of the settlement with Hachette, Simon & Schuster, and HarperCollins, she had quoted a poem in her opinion to stress the importance of books.
“There can be no denying the importance of books and authors in the quest for human knowledge and creative expression, and in supporting a free and prosperous society. To quote Emily Dickinson: ‘There is no Frigate like a Book / To take us Lands away, / Nor any Coursers like a Page / Of prancing Poetry— / This Traverse may the poorest take / Without oppress of Toll— / How frugal is the Chariot / That bears a Human soul.’ ”
Toward the end of the hearing, a lawyer for the Justice Department asked if Cote might share her thoughts on the case based on the evidence. Unlike the patent trial against Samsung, this would not be a jury trial but a bench trial decided by the judge herself.
Surprisingly, the judge acquiesced. While she stressed that her view was still tentative and based only on the emails and correspondences among the companies named in the conspiracy, she indicated that she was siding with the Justice Department.
“I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books,” she said, “and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that.”
The judge promised to keep an open mind, but the statement was worrisome for Apple. Before the trial had even begun, Cote had already begun writing a draft of her decision.
19
The Red Chair
In late May 2013, on the opening night of the Wall Street Journal’s annual three-day tech gathering, Tim Cook walked onto a stage in front of hundreds of his peers and settled into a bright red leather chair.
The All Things Digital conference was an invitation-only event hosted by Walt Mossberg and Kara Swisher, two of the biggest names in technology reporting. The speakers were mostly A-list executives from the hottest companies. With a no-nonsense style, Mossberg and Swisher questioned executives in front of more than six hundred of the smartest and most influential players in the industry. No speeches or slide presentations were allowed.
For years, Steve Jobs had sat in the same red Steelcase chair, drawing the audience into his reality distortion field with his always entertaining and sometimes misleading insights about Apple, its competitors, and the industry. In 2007, he flashed the iPhone that Apple was about to put on the market. “Best iPod we’ve ever made. . . . Best phone we’ve ever made, too,” he quipped as the audience laughed. At his last conference in 2010, Jobs spoke about everything from Apple’s products to controversies such as the missing iPhone 4 prototype and the lack of Flash support. He held the audience spellbound, tantalizing them with nuggets such as how the iPad development started before the iPhone and how Apple was structured like a start-up.
Cook’s first appearance was in 2012, nine months after he had been appointed CEO. Both the hosts and the audience were warm and supportive as he sounded an optimistic note in his first extensive interview. “It’s an absolutely incredible time to be with Apple,” he said, “and I’m loving every minute of it.” Cook had been thoughtful and genuine in his enthusiasm. Attendees were also pleasantly surprised by his sense of humor.
This year, as Cook sat in the red chair again, the tone of the conversation was more pointed. Before the CEO could catch his breath, Mossberg was cataloging the problems now clouding Apple’s horizon, starting with the challenges from Samsung and Android, then moving on to the controversies in Congress and in China.
“You’re being beaten up by various governments over various things, and your stock is down—down significantly. . . . I actually don’t know the price of the stock, but whatever. There’s a sense that you may have lost your cool, that someone else has got the cool—that Samsung has got the cool.”
Mossberg then asked the question on everyone’s mind.
“Is Apple in trouble?”
“Absolutely not.”
Cook was smiling, but his delivery was unconvincing. He fell back into the company line about how iPhone and iPad owners used their phones and tablets more than other device owners. He spoke of the “unprecedented” number of new products Apple had released the previous year, but neither his voice nor his face showed any emotion.
“I feel pretty good. I feel pretty good,” he claimed, but his voice dropped weakly.
Swisher refused to let him off the hook. In the tech world, she said, there was a growing sense that Apple was on the decline. “You have a lot of really tough rivals compared to before.”
“We’ve always had competent rivals,” Cook countered, citing Microsoft and Dell. He put his hands thoughtfully together as he returned to another oft-repeated line. “Our North Star is always on making the best products.”
“So the outside perception doesn’t bo—?” asked Swisher. “Because it’s there. It’s clearly there and you hear it more and more. People are worried for Apple.”
Cook said the perception did not trouble him. He acknowledged that the declining stock price was frustrating, but he reminded Swisher that it wasn’t unprecedented. “I guess the beauty of being around for a while in this is that you see many cycles,” he said, trying to sound philosophical. “If we make great products that enrich people’s lives, then the other things will happen.”
Mossberg and Swisher turned their attention to products. As Cook started to defend the iPad mini, saying that innovation didn’t have to mean creating a whole new category of devices, Mossberg cut him off. “I’m not trying to do a wordplay here,” he said. When, he asked, was Apple coming out with the next big thing? Where was the television? What about wearable devices like Internet-connected glasses and watches?
“I don’t want to go into detail,” said Cook, deflecting. “I don’t want to answer those. . . . I have nothing to announce.” Jobs had never talked about upcoming products, either, but at least he had always had something interesting to say about the company’s creative process. He knew how to intrigue an audience without actually revealing anything new.
Didn’t Cook worry about competition from Android?
“I don’t have my head stuck in the sand,” he said, referring a second time to how much time people spent using Apple’s products. Every time the interviewers pressed him on Apple’s plummeting market share, Cook tried to change the subject. As the minutes ticked by, the smile on his face grew tight.
The hard questions just kept coming. Was the amount that people actually used Apple products the only meaningful metric? Did sales figures of Apple devices no longer matter? What about customer satisfaction? Young people, Swisher pointed out, were
n’t using iPhones as much anymore because they were bored by the look and feel of the device. Was Cook worried about the graying of Apple’s demographic? Was the company working on a redesign to appeal to younger consumers?
“Our customers are all ages,” said Cook, “and I love that.”
By now he was running out of ways to say nothing. His answers began to strike the same note. Apple was doing great, he insisted. Exciting new products were coming down the pipeline, he promised. His confidence in the company’s future, he said, had not wavered. Everyone on his team was doing fabulous work, he said. The culture inside One Infinite Loop was unchanged. Everything was still hunky dory.
Cook was looking away now, barely glancing toward the audience. He was fidgeting with his watch. Had he ever been backed into a similar corner, Jobs might well have exploded. Cook remained unfailingly polite, even as his entire body went rigid. Only a few weeks before, in preparation for his testimony before Congress, he had been coached on how to handle an interrogation. Working hard to sound logical, he slowed down his answers and quoted numbers and statistics. He stuck to the script, fending off any attempt to lead him off message. Such tactics had worked well when faced with aging senators whose understanding of technology was minimal. But this audience was not so easily fooled. This was a savvy Silicon Valley crowd. In this room, Cook’s answers fell flat.
Asked about the upcoming e-book trial, the CEO tried to trivialize the government’s case. He said that Apple had done nothing wrong, that it had conducted its dealings with the publishers with complete propriety, and that in the end he and his company would be vindicated. On a question about why Apple wasn’t making better use of its piles of cash by buying companies, he argued the premise of the question rather than responding directly. Just about the only admission he was willing to make was that the company had screwed up with Apple Maps, which was not only self-evident but also a statement he had made before.
The performance was a disaster. Cook came across as delusional and painfully out of touch. If he was truly unfazed by the host of problems facing Apple, if he actually believed that everything was going well, then the company was really in trouble.
A particularly worrisome moment came near the end, when Dan Benton, a well-known tech-focused hedge fund manager, stood up and made a pointed observation. Cook’s comments, Benton noted, sounded like the kind of rationalizations that Apple had resorted to in the nineties, before Jobs had returned, when the company was on the verge of going under.
“Why won’t you let us dream? The guys at Google are presenting a world right now of gigabit fiber and weather balloons that do wireless and Google Glass,” he said. “Why won’t you give us a glimpse of the future as Apple sees it?”
Benton was practically begging the CEO to share some hint of a vision. Cook’s reply was so dispassionate that it sucked the air out of the room.
“From at least the last fifteen years, we’ve done the same thing,” he said, speaking almost by rote. “We release products when they are ready, and we believe very much in the element of surprise, and we think customers love surprises, so I have no plans on changing that.”
Even before Cook left the stage, audience members were sending out withering critiques.
“If ‘incredible’ was tweeted trigger for Tim Cook drinking game, #d11 would be an alcoholic toxic disaster,” tweeted Wired’s senior writer Steven Levy. Tonya Hall, whose news program aired on Bloomberg Radio, tweeted: “The leadership gap left by Steve Jobs looks widest when Tim Cook is on stage talking about the company.”
Some of the sharpest criticism came from Fortune senior editor Adam Lashinsky, whose coverage of Cook’s regime had been mostly favorable until this moment.
“It is a strange sight to see the CEO of Apple, a company known for its brilliance and vision, decline over and over to discuss just about anything in any detail,” he wrote, saying that reporters were grasping for kernels of news. The journalist called the interview “alternately painful and tedious.”
One of the toughest questions at the All Things Digital conference had been about Apple’s ongoing patent war.
“You’ve been involved in patent litigation on Android for several years now and as far as I can tell, it hasn’t really accomplished you anything, right?” said Nilay Patel, managing editor of technology site The Verge. “When does this end for you? What is the endgame?”
Cook had no good answer.
“I’m not negotiating it this evening,” he said. “It’s a values thing. This is about values at the end of the day.”
More than three years after Apple began its war against Android, the company seemed no closer to a resolution. Its lawsuit against HTC had been settled, but it was still waging a two-front war with Motorola and Samsung.
In Apple’s dispute with Motorola, the preeminent Judge Richard Posner had thrown out what had been expected to be a big court case in Chicago because it didn’t make economic sense. He argued that advances in the software industry didn’t require the kind of big up-front investments that justified legal protections and that companies benefited enough from being first to market with a technology. Appeals on that ruling as well as other cases around the world were winding their way through court.
Meanwhile, the fight against Samsung raged on. Negotiations had continued through the spring. A memorandum of understanding for a potential settlement had been drawn by representatives for Apple and Samsung and sent to senior managers on both sides. But so far none of those efforts had amounted to anything.
Publicly, Apple was taking a bullish stance. Its claims against Motorola and Samsung were received with mixed results, but its defense strategy was more successful. Apple had launched an aggressive public relations campaign against the standard essential category of patents that it was accused of infringing. The company also appealed to various government agencies and telecommunications bodies to set basic licensing standards, saying that companies were overvaluing patents that they were obligated to license on fair and reasonable terms. As a result, Apple had successfully defeated the majority of standard essential patent claims by Samsung. European regulators were also investigating.
But as meaningful as these rulings were, they didn’t protect the key innovations that were supposed to differentiate iPhones and iPads. Every day that the court cases dragged on was a victory for Samsung and Motorola, who could keep selling their devices. That potentially had broad implications for Apple’s future business. Android’s collective market share gains would allow Google, not Apple, to control the burgeoning digital content business.
Throughout the spring and summer, Apple won some battles and lost others. In early June, the U.S. International Trade Commission sided with Samsung on a standard essential patent that covered technology used to send information over wireless networks. The ruling barred the importation of certain iPhone and iPad models that were designed to work on AT&T’s networks. The trade commission rejected Apple’s argument that Samsung couldn’t use the patent to seek an injunction and said it believed Samsung’s proposed royalties for licensing its patents were reasonable and offered in good faith. The commission also criticized Apple for using Samsung’s patents without compensating the company under the guise that the licensing terms weren’t fair or reasonable.
The impact of the ban was not huge. The devices in question were all older models, and the only one with meaningful sales was the iPhone 4 version for AT&T. Piper Jaffray estimated that the ban could cost Apple about $680 million, or 1 percent of its revenues for the next two quarters. But Apple appealed to the Obama administration to disapprove the ban before the order took effect. If it was granted, it would be the first time in almost thirty years that a president had intervened in an import ban.
On the morning of June 3, 2013, the Manhattan courtroom of the U.S. District Court for the Southern District of New York was packed with reporters as Apple and the Department of Justice finally faced off in the e-book price-fixing trial. Banned from bringing cel
l phones, laptops, and other electronic devices into the building, journalists were relegated to taking notes with pen and paper. The benches were hard and the over-air-conditioned rooms chilly.
Apple’s legal counsel had a big hurdle to overcome. After reading the judge’s pretrial comments saying that she believed the government would be able to prove the price-fixing, Apple’s lawyers were concerned about their clients’ ability to receive a fair trial.
“We respectfully and humbly ask this court to erase, to hit the delete button on any tentative view that might exist in the court’s mind today,” said Apple’s lead attorney, Orin Snyder, in his opening statement. “We will demonstrate that Apple not only didn’t conspire but should be applauded and not condemned for its . . . beneficial impact on the e-book market.”
Almost immediately, the judge cut him off, saying that she only offered her pretrial views with the consent of both parties.
“This isn’t a vote about whether I like Apple or anyone else does,” Cote said. “The deck is not stacked against Apple unless the evidence is stacked against Apple.”
In a nearly three-hour opening statement, Snyder argued that Apple had acted purely in its own interests, and that the pricing arrangement that the company had reached with each publisher was widely used in business and not illegal. Citing a U.S. Supreme Court case involving Monsanto, Snyder argued that Apple had legitimate reasons as a distributor to discuss prices with the publishers. Moreover, he asserted that Apple introduced healthy competition in a market that had been dominated until then by Amazon. He claimed that e-book pricing had fallen overall and the number of digital books available had increased since Apple launched its bookstore.
“Apple is going to trial because it did nothing wrong,” declared Snyder. He accused the government of presenting evidence out of context and distorting the facts. “It’s the first time in the history of antitrust laws that a new entrant coming into a concentrated market . . . is condemned,” he said, calling the case “bizarre.”
Haunted Empire: Apple After Steve Jobs Page 35