Court hears terse testimony in e-book trial

Macmillan CEO John Sargent, who testified this week at a trial over alleged price-fixing of e-books, was no one’s idea of a friendly witness.

Of the five publishers the U.S. Justice Department sued last year, Macmillan was the last to settle and the most defiant. The government alleged that Macmillan, HarperCollins, Simon & Schuster, Penguin Group (USA) and Hachette Book Group illegally conspired to raise wholesale prices in an effort to help Apple make headway against Amazon in the e-books market. Speaking last month at BookExpo America, the publishing industry’s annual convention, Sargent labeled the government’s view of the e-market as “extraordinarily myopic.”

CEO testifies

“They carried the water for Amazon, when it had 92 percent of the market,” he said, criticizing the justice department for caring more about price than a possible monopoly. “The senior guys, (Attorney General) Eric Holder, are just incompetent.”

Apple is the only defendant left in the antitrust suit, filed in response to the 2010 launch of the iBookstore and a new “agency” pricing system. Publishers, who had worried that Amazon’s pricing of some new e-book releases at $9.99 was crippling to the industry, welcomed the arrival of Apple and an “agency” model that allowed publishers, not retailers, to set the cost of e-books. Many new releases were sold for $12.99 or $14.99, a change the government has cited as unfair to consumers.

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Apple has insisted that its entrance into the e-book market improved the online book industry and stabilized prices for the long term.

Sargent, 56, has said he only settled because Macmillan, owned by the German-based Holtzbrinck Publishers, was “not large enough to risk a worst-case judgment,” an opinion he clearly still held on the stand. Whether under direct or cross testimony in U.S. District Court on Monday and Tuesday, the lean, graying Sargent changed neither his posture nor manner of speaking. His dark, deep-set eyes stared right at the questioning attorney, his head was erect, chin upturned, his answers crisp and often terse.

“What I’m doing here is negotiating,” he said in response to questions from Justice Department lawyer Mark Ryan about exchanges he had with Apple over contract terms.

Sargent is seasoned in conflict. In January 2010, soon before Apple announced its e-book store, Sargent became the point man in the publishers’ dispute with Amazon when the online retailer disabled the “buy” tabs for releases by Bill O’Reilly, Jonathan Franzen and other Macmillan authors.

Sargent said that he had proposed that Amazon either accept the agency model or face a “window” of seven months before new e-books would become available - a policy that had become common among publishers in 2009 because of fears that cheap e-books of new releases were harming the hardcover market. The standoff ended after a few days with Amazon agreeing to the agency system.

Sargent acknowledged that his initial discussions with Amazon did not “go well” and that having four other major publishers sign with Apple would strengthen Macmillan’s position in negotiations. But he resisted suggestions by Justice Department lawyer Mark Ryan that he had forced Amazon to adopt the agency system. When Ryan suggested that Apple pressured Sargent into making Amazon accept agency, the Macmillan CEO said that such a scenario was “completely alien” to him.

Sargent also denied that he consulted with Apple on his negotiations with Amazon. He said that the practice of telling one client about his talks with a rival client was bad business and bad ethics, if only because an executive for one retailer might take a job with another retailer and reveal what Sargent had said.

“There’s no trust left (if that happens),” Sargent explained.

The rise of e-books is the trial’s backdrop, from Amazon’s introduction of the Kindle reading device in 2007, to the explosive growth of digital sales in 2008 and 2009. All the while, publishers’ feared that Amazon was dominating the market and selling books at unsustainable prices.

Both Ryan and Apple attorney Orin Snyder noted a Macmillan strategic memo from 2009 that referred to the e-book market as “fluid” and to the likely emergence of Barnes & Noble, Google and other new competitors. Asked by Ryan whether the memo contradicted Sargent’s pre-trial testimony that Amazon was consolidating its hold, Sargent said it didn’t. He called Barnes & Noble’s entry a question mark because the superstore chain had no experience designing electronic devices. Sony, an early maker of e-readers, was “clearly failing.” And Google, he said, has never showed a knack for retail.

“They’re very good at running search engines,” Sargent said.

With publishers accused of collusion on prices, Sargent found himself discussing the shifting relationships among rival houses. They might fight to sign up a given author, or juggle release schedules of popular books in hopes of gaining a coveted No. 1 spot on one of the New York Times’ best-seller lists. At other times, they are business partners with common goals, whether fighting piracy or censorship.

Overall, publishers do not view the market as a zero sum game in which the purchase of a Macmillan book comes at the expense of one from Simon & Schuster or Random House. They are more likely to see a sale for one publisher as helpful to others, what economists might call a “multiplier effect.” Just as reading often begets more reading, the sale of a book, hopefully, leads to the sale of more books.

Referring to Amazon’s disabling of the “buy” tabs in 2010, Ryan asked Sargent whether he was worried a customer who might have bought a Macmillan book would instead buy one from a different publisher.

No, Sargent responded, he worried only that the customer didn’t buy a Macmillan book.

Associated Press