Apple Executive Defends Pricing and Contracts in Antitrust Case

“Wow, we have really lit the fuse on a powder keg,” Mr. Jobs wrote in the e-mail dated Jan. 30, 2010, to Eddy Cue, Apple’s senior vice president of Internet software and services.

The e-mail was brought up as evidence during the second half of Mr. Cue’s testimony in a Manhattan courtroom on Monday, where much of the discussion focused on whether Apple intended to help the publishers raise Amazon’s prices.

Mr. Cue testified on Monday that Mr. Jobs’s e-mail was not a memo congratulating him about how Apple’s entry into the e-book market affected Amazon, causing it to switch to a business model called agency pricing, where the publishers, not the retailer, set the price of the books. Mr. Cue said Mr. Jobs was remarking on the company’s ability to “cause ripples” in the e-book industry, which was then largely dominated by Amazon.

While Mr. Cue conceded that some e-book prices had gone up as a result of agency pricing, he noted that many titles might not have become available in any digital store at all if Apple had not introduced agency pricing to the market. He said he had learned from his meetings with publishers that they were unhappy with Amazon’s uniform $9.99 pricing for e-books and that they were planning to use a tactic known as windowing — delaying the release of an e-book until after the more expensive hardcover had been in stores for a while.

Mr. Cue testified that both he and Mr. Jobs believed that “withholding books is a disaster for any bookstore.”

The Justice Department was not persuaded. Lawrence Buterman, a Justice Department lawyer, asked Mr. Cue whether he was aware that only 37 e-books had ever been windowed.

“The number doesn’t matter,” Mr. Cue said. “What matters is which books. Thirty-seven could be a huge number if it’s the right books.”

Both parties showed their evidence on a projector screen. Apple’s legal team used a MacBook to shuffle between evidence documents, stacking them side by side in split screens and zooming in on specific paragraphs.

In contrast, the Justice Department’s lawyers could show only one piece of evidence at a time. One video that Mr. Buterman played as evidence failed to produce the audio commentary needed to make his point.

In its antitrust case brought a year ago, the federal government is trying to cast Apple as the ringmaster that conspired with five big book publishers to raise e-book prices. The publishers have all settled their cases.

On Monday, the Justice Department’s lawyers homed in on a condition in Apple’s contracts with the publishers: the “most favored nation” clause, which required publishers to allow Apple to sell e-books at the same price as the books would be sold in any other store. Apple has said this clause existed to guarantee that Apple customers got the lowest e-book prices. But Mr. Buterman argued that it defeated Amazon’s ability to compete on price, and that it left Amazon with no choice but to switch to the agency model while allowing the publishers to raise prices.

Mr. Cue said he disagreed. He noted that Amazon had 90 percent of the e-book market before Apple entered the game.

“Amazon could have negotiated a better deal,” he said. “They had a lot more power.”

Lawyers for Apple and the government spent much of the hearing debating whether the e-mails exchanged between Apple executives and publishers illustrated Apple’s intent to help the publishers force Amazon’s hand. In one e-mail sent to Mr. Jobs, Mr. Cue was reviewing his meeting with the publishers, saying they were interested in solving the “Amazon issue.”

Mr. Cue said he was referring to the publishers’ ability to price books above Amazon’s uniform price of $9.99 in Apple’s iBookstore. Apple had proposed price caps of $12.99 to $14.99 for new releases. But he said this did not refer to enabling the publishers to force Amazon to raise prices, too.

IPhone Contracts With Carriers Under Scrutiny in Europe

Although they have not filed formal complaints, a group of European wireless carriers recently submitted information about their contracts with Apple to the European Commission, according to a person briefed on the communications with the carriers who asked not to be identified.

This person said the accusations focused on Apple’s contracts with French carriers, though other countries may also be involved.

In a statement, the European Commission, the union’s administrative arm, which oversees antitrust enforcement in the 27-nation bloc, confirmed that it was examining Apple’s carrier deals. But it said it had not begun a formal antitrust investigation. The commission is not obligated to act until it receives a formal complaint of anticompetitive behavior. That it is already examining the contracts suggests that it is taking the carriers’ concerns seriously.

“We have been contacted by industry participants and we are monitoring the situation, but no antitrust case has been opened,” said Antoine Colombani, a spokesman for Joaquín Almunia, competition commissioner of the European Union.

Elaborating at news conference in Brussels on Friday, Mr. Colombani reiterated that no formal complaints had been brought against Apple, and suggested that regulators would need to judge the relevance of any allegations in such a dynamic sector before taking any steps that could lead to a formal antitrust case.

An Apple spokeswoman, Natalie Kerris, said, “Our contracts fully comply with local laws wherever we do business, including the E.U.”

It was unclear how many carriers were in discussions with the European Union. Based on several interviews with people briefed on iPhone contracts, it appears that Apple’s contracts with some smaller European carriers were stricter than those with larger companies.

People briefed on the carriers’ relationships with Apple, who declined to be named because Apple does not permit them to speak publicly about the contracts, said the terms that some European carriers must accept to sell iPhones are unusually strict, making it difficult for other handset makers to compete.

The issues do not appear to apply to carriers in the United States; an executive at an American carrier said the terms of its contract with Apple were aggressive but not unreasonable. Apple is well known for tightly controlling the design of its products, down to the smallest of details, and closely controlling its manufacturing. Its relationship with carriers, long cloaked by strict nondisclosure agreements, offers a window into the similar levels of control Apple exerts on business partners who want to sell the iPhone.

While European carriers quietly grumble about Apple’s muscle in the marketplace, Apple does not force any of them to sell the iPhone — it does not need to. Carriers are petrified at the thought of not having the smartphone because it remains a huge hit with the public, driving waves of customers to their stores, especially in the months after the latest models are introduced and heavily advertised.

Apple’s contract differs with every carrier that sells the iPhone. Such sales accounted for 56 percent of Apple’s $55 billion in revenue last quarter. In most cases, Apple sets a quota for how many iPhones the carrier needs to sell over a set period of time, usually three years. If it does not agree to the quotas, it does not receive the iPhone.

If quotas are not met, the carrier is obligated to pay Apple for unsold devices, according to one person who negotiated with Apple while at a European carrier.

That remains a largely theoretical risk at this point, however, because demand for the iPhone still exceeds supplies almost everywhere it is sold. Apple’s iPhone 5 was the best-selling smartphone in the world during the fourth quarter of 2012, outselling competing models from Samsung, the biggest maker of mobile devices in the world, according to Strategy Analytics.

Charles Duhigg contributed reporting.