Haunted Empire: Apple After Steve Jobs

by Yukari Iwatani Kane

  The government pressed the facts. Relying on 834 exhibits, including records of emails, telephone calls, and text messages between Apple and the five publishers that had also been named in the suit, the government vowed to prove that Apple had coordinated an old-fashioned price-fixing conspiracy by giving the publishers the leverage they needed to force Amazon to change its business model.

  The specter of Steve Jobs loomed in this courtroom, just as it had in the San Jose trial. A key component of the government’s case was a comment that Jobs had made to Walt Mossberg in an interview, that book prices would be the same across all of the retailers. Another piece of evidence included remarks that Jobs had made in Isaacson’s book.

  “Amazon screwed it up,” Jobs had told the biographer. “It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that—they thought it would trash their ability to sell hardcover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.’ But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books.’ ”

  From the beginning, it was clear that the trial would come down to the testimony of Eddy Cue. As Jobs’s deal maker and right-hand man for e-commerce and media, Cue had been the point person in the six weeks of negotiations with the publishers before the introduction of the iPad and the iBookstore on January 27, 2010. While the government sought to prove that Cue had played a central role in forcing Amazon and others to change their business models, Apple claimed that Cue had only reached the best deal that he could, without regard to the publishers’ relationships with other retailers.

  Cue took the stand on a Thursday morning in the second week. Shedding his usual jeans and button-down shirt, he appeared in a gray suit, white shirt, and a red tie. In the courtroom, as he answered the government’s questions, Cue was so smooth that he almost seemed cheerful. When he disagreed, he did so calmly, saying, “No, that is not correct.”

  According to Cue, Apple had initially considered buying books at wholesale and selling them for a profit. But when the company found that Amazon was buying books at wholesale and selling them at a significant discount, Cue had to figure out another business model. He had seized on the agency model when two of the publishers suggested it. The publishers would benefit because they could set the prices, and Apple would be guaranteed a 30 percent cut of revenues no matter what.

  In the course of the questioning, Cue readily admitted that e-book prices had risen after Apple opened its iBookstore and that he had met with all of the publishers and offered them the same terms. He even acknowledged that for a short time, Apple had sought to force publishers to impose the agency model on all of their retailers.

  Cue explained that he backed off from the requirement, not because he realized the provision would be illegal but because there was no way for him to be sure that the agency deals that the publishers struck would be the same across the board. He was worried about the leverage that Amazon and Barnes & Noble would have from their physical book retail business. He also concluded that he had no ability to enforce an agency structure on Apple’s competitors if the publishers couldn’t persuade them to agree.

  Though the judge had carefully remained neutral, she seemed to be coming around to Apple’s perspective. The rules against horizontal price-fixing were clear. Companies in the same industry cannot collude to fix prices. But Apple was not a fellow publisher. It was a distributor. Its relationship to the publisher was vertical. Apple had made a compelling case that it was expected to negotiate the best price it could. In taking the actions that were construed by the government as price-fixing, Apple could have in fact been acting in its own interests. Apple may have exploited a situation to its benefit. But as a late entrant to the market, was it really capable of orchestrating a price-fixing scheme?

  “I look forward to the summations,” she said in the last moments of the trial. “To me, the issues have somewhat shifted during the course of the trial. . . . As you see it play out in the courtroom, things change a little bit.”

  Almost three weeks later, the judge handed down her decision. Apple, she said, was liable.

  “Apple seized the moment and brilliantly played its hand,” Judge Cote said. “It provided the Publisher Defendants with the vision, the format, the timetable, and the coordination that they needed to raise e-book prices.”

  Throughout her 160-page ruling, she was brutally critical of Cue’s testimony. Contrary to some predictions that Cue had won the trial for Apple, the executive had failed to convince the judge of anything except his unreliability.

  The judge made her disdain clear in a series of what one reporter called “acid footnotes.” She pointed out Cue’s inconsistencies and a host of improbabilities in his testimony. She called Cue a “savvy negotiator” and referred to one of his denials as “brazen.”

  “[R]egrettably,” the judge concluded, “he was not credible.”

  Cote was just as unrelenting in the main body of her ruling. She referred to Apple’s evidence as “not persuasive” and said “many of the trial’s fact witnesses employed by Apple and the Publisher Defendants were less than forthcoming.” She also found Jobs’s exchanges with his biographer revealing.

  “Jobs himself,” she noted, “was frank in explaining how this scheme worked.”

  She pointed out that Apple itself did not try to deny that the publishers had engaged in price-fixing but chose instead to argue that it didn’t know about it.

  Cote deemed Apple’s participation in the conspiracy “essential” in making sure that a critical mass of publishers would move forward with the same agency terms. She asserted that the pricing agreements between Apple and the publishers had “destroyed” competition rather than promoted it.

  As the judge had mentioned in the pretrial hearing, much of the background in her ruling read as if she had prepared them in advance. But the last thirty-eight pages addressed Apple’s defenses one by one. Cote disputed Apple’s claim that it had acted independently in its own interests because the scheme had required the coordinated effort and conscious commitment of the publishers and Apple. She acknowledged that agency and most-favored-nation agreements were not illegal in and of themselves, but she added that did not mean a company could use those practices to restrain trade. In response to Apple’s argument that the publishers would have withheld their books from the market if the company hadn’t entered the market, the judge wrote that there was no evidence that the practice would have ever become widespread.

  “From its very first meetings with the Publishers, Apple appealed to their desire to raise prices,” she said. The judge expressed doubt that Apple had approached the initial meetings with publishers with no agenda, given Cue and his team’s accomplished professionalism, the thoroughly reported challenges in the publishing industry, and the company’s own short timeline to reach agreements with publishers. “One could ask why Apple has taken pains to argue that the mid-December meetings were simply a commercial listening tour,” she said before answering her own question—any finding that the meetings were more than casual confirms Apple’s intent to raise prices.

  “The evidence is overwhelming that Apple and the Publisher Defendants’ ‘minds met’ and they moved as one to achieve their conspiratorial objective.”

  In the aftermath of the ruling, Apple’s defense team suggested that it had always known that its chances of winning were low, but they had hoped to raise enough questions for an inevitable appeal, arguably the more important phase of the dispute. The publishers have continued to deny that they conspired or engaged in any illegal or wrongful conduct.


  The ruling was nevertheless devastating. Not only was Cote a well-respected judge and her decisions known to be difficult to reverse, but Apple’s failed defense was also the same message that the company projected in its branding: The company worked for the greater good and was not bound by mortal concerns like profit. A part of Apple’s narrative was that it wanted to change the reading experience and give consumers a better tool. And to a great extent, this was true. As Judge Cote put it, Apple had allowed cooks to learn how to make beef bourguignon from Julia Child. Children could run their fingers over a touchscreen while reading Winnie-the-Pooh. But those good intentions did not alter or excuse how Apple had worked with the publishers to squeeze Amazon. The company’s inability to convince the judge otherwise signaled a breakdown in its image.

  The deflections that had triggered the judge’s disapproval were essentially identical to the tactics that Apple’s public relations department employed with reporters—picking apart questions and answering them narrowly or not at all.

  For years, this method of fending off inquiry had protected Apple’s sacrosanct brand. During the patent trial with Samsung, the carefully rehearsed testimony of the executives had dazzled the jury. On Capitol Hill, Cook’s precisely modulated mix of deference and defiance had allowed him to charm the senators. These tactics had not succeeded during Cook’s public grilling at All Things Digital, where he had faced questions from insiders who were not satisfied with the company line. In the e-books case, Apple’s evasions had proved even more disastrous. During the heat of the trial itself, Judge Cote seemed to fall under Apple’s spell. But after she had time to dissect the testimony of Cue and the other witnesses, she had called the company out on its evasions. Again and again she struck at the heart of Apple’s meticulously crafted image of faultless virtue.

  Cook’s debacle in the red chair was a warning. So was the judge’s condemnation.

  Apple was losing control of its narrative.

  20

  Manifesto

  On a cloudy morning on June 10, 2013, Apple’s faithful made their annual pilgrimage to San Francisco for the Worldwide Developers Conference. As always, the scene outside the Moscone Center crackled with anticipation. Police stood watch while the staff, identifiable by their bright red shirts and black pants, directed the flood of foot traffic. A half hour before Tim Cook’s keynote, people rushed to join the line that snaked around the building.

  The five-day conference had long served as the center stage for Apple’s ambitions—the place where the company lowered its defenses every summer to unveil its latest wonders, to grant the disciples a glimpse into Apple’s next chapter and excite them about the future. Apple engineers held sessions and mingled with the attendees to offer advice and exchange ideas about how developers could build software for iPhones, iPads, and Macs. Organized and scripted entirely by the company, the keynote that kicked off WWDC was a safe haven of possibility. Here no reporters were permitted to pummel execs with impertinent questions about market share or stock prices. No black-robed judges sat on high, wagging their fingers at the gulf between the company’s saintly rhetoric and its predatory behavior. In this hall, the microphone was controlled by Apple, not a gaggle of U.S. senators who couldn’t figure out how to update the apps on their iPhones.

  If the company was going to regain control of its narrative, this was the moment.

  Even among the company’s most ardent fans—those pilgrims waiting for the doors to open—the innovation drought was raising eyebrows. It had been more than three years since the first iPad was introduced, six years since the original iPhone, and almost twelve since the iPod. Apple had only released new iterations of these devices since then, but they had been incremental advances, not bold new ventures, and some of the recent updates had been clouded by snafus and disasters. The faulty antenna, the comic mishaps of Siri, the maps debacle. Was the losing streak finally ending?

  A block from the event hall, one of the believers pondered these things as he handed out steaming cups of coffee from the bed of a Radio Flyer wagon. Jordan Eskenazi worked for a Colorado start-up called Push IO. Along with others from the start-up, he had flown into San Francisco the day before. He had assembled the wagon that very morning just to have something to hold the coffee in. Along with the caffeine, he was passing out stickers. Push IO was also hosting a party that night for seven hundred developers. Eskenazi was excited about attending his second WWDC even if it required him to pull a toy wagon through the streets of San Francisco. But when the conversation turned to Apple’s prospects, he grew slightly uncomfortable.

  Eskenazi didn’t want to sound negative. Push IO had been cofounded by a former Apple manager and existed because of the app boom that Apple had spawned.

  “I’m not going to say anything bad.” He paused, then added wistfully: “They could be doing better. It’s sad that Jobs isn’t here anymore.”

  Even on this street corner, the emperor’s ghost hovered. In the span of a few minutes, Eskenazi referred to the fallen CEO but did not mention by name any of the lieutenants who had succeeded him. Nearly two years after his passing, they still disappeared in his shadow.

  Eskenazi hoped aloud that Apple would show sparks of its old self. That’s what everyone at the conference wanted, he said.

  “With Jobs gone,” he asked, “what is the new big thing going to be?”

  Whether Apple’s executive team wanted to admit it or not, they still had not found a way out of the genius trap. This was the question that defined them, hounded them, haunted their every decision. Now that their visionary leader had morphed into a global icon, his influence untouched by death, would they ever find the imagination and force of will to reignite the flame? Or was Apple on its way, as many suggested, to becoming just another company? One of the most successful companies in the world, certainly, but even so, a company that excelled primarily at making profits, not changing the world.

  Down the street, the masses were filing into the convention hall, eager to hear the answer.

  When Tim Cook and his team stepped into the spotlight, they bulldozed over any suggestion that Apple had lost its touch.

  Soaking up the wild cheers of the audience, they boasted again and again about their company’s creativity and innovation. They quoted surveys on how much customers adored Apple, touted the many awards Apple had won, bragged about how their next generation of products was better than ever, easier to use, more beautiful, more amazing, more great, more spectacular. Within a few minutes, they were already running out of fresh superlatives, but they kept going, recycling the same praises over and over like a blissed-out prayer.

  They previewed new voices for Siri, male and female, and promised that Siri had grown smarter, and that the maps app was new and improved, too. They made these vows with straight faces, avoiding any acknowledgment of the humiliations that had necessitated these corrections. Under these lights, amid the fervor of the crowd, there was only room for triumph. The executives put up a big slide showing that the App Store had now reached fifty billion downloads, and they played a video showing off the opening of the latest Apple Store, this one in a truly stunning old theater the company had renovated in Berlin. They announced that the new MacBook Air would have up to twelve hours of battery life, and that apps on the iPhone would now update automatically, and that the company would no longer name each new version of its desktop operating system after species of big cats, the most recent of which was Mountain Lion. The new versions would be named after inspiring places in California. First up would be Mavericks, after the legendary surfing beach. They cued up “Gimme Shelter” on iTunes Radio, their new streaming app, and they played the monster opening to Led Zeppelin’s “Whole Lotta Love”—a real achievement given Zeppelin’s historic resistance to allowing its catalog onto any streaming service. They checked the weather at the North Pole and brought out a pair of robotics experts who credited Apple’s products for giving them the tools to design toy racing cars piloted with artificial in
telligence. At one point, some of the toy cars crashed off the little track that had been rolled out for the demo, but apparently that was part of the fun. Either way, the toy car app was going on sale that day.

  The biggest news of the morning came when Cook announced the latest version of the iOS operating system for the iPhone and iPad, grandly pronouncing the software to be “the biggest change to iOS since the introduction of iPhone.” Demonstrating the new system, software chief Craig Federighi raved about the new look and feel of his own product.

  “It’s unbelievable,” he said. “It’s just gorgeous. From the typography on this lock screen to the vitality of the background, the animation, to the home screen with these icons. It looks so great. It just looks fantastic.”

  Appearing on a video, speaking solemnly as always in his British accent, Jony Ive declared that Apple saw the iOS7 as “defining an important new direction and in many ways, a beginning.”

  When Phil Schiller introduced a new cylindrical Mac Pro microcomputer, he struck a nationalistic tone, emphasizing that Apple was assembling the computer in the United States. Left unmentioned was the fact that many of the pieces inside the Mac Pro would still be manufactured overseas. Turning to the big screen, Schiller showed a video that visually linked the design with the curvature of Earth, leaving no doubt about how magnificent Apple considered the new product to be. When the video ended, Schiller nodded with satisfaction as he delivered what was clearly a scripted line.

  “Can’t innovate anymore, my ass,” he said.

  As the audience hooted and cheered, the camera crew shooting the session for the live stream zoomed in cheekily on Steve Wozniak, who, earlier in the year, had made public statements on his old company’s diminishing creativity. This shot, too, seemed planned. To pull it off, the crew had to scout out Wozniak’s seating location in advance and then wait for Schiller’s money quote. The gotcha moment was similar to when the Oscars telecast showed the faces of nominees as they learned whether their names were in the envelope or not. Was it a flourish of choreographed revenge, a staged dose of instant karma aimed at embarrassing Wozniak?