DealBook: Michael Dell Defends His Leveraged Buyout Offer

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DealBook: Michael Dell Defends His Leveraged Buyout Offer

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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.

Apple Negotiator Defends Tactics in E-Book Trial

The executive, Eddy Cue, Apple’s lead negotiator with the publishers, said he was determined to close deals that would allow them to sell their e-books on Apple’s iBookstore in time for the introduction of the iPad in early 2010.

“I wanted to be able to get that done in time for that because it was really important to him,” Mr. Cue said, referring to Mr. Jobs. He was testifying in Federal District Court in Manhattan in the civil antitrust trial brought against Apple by the Justice Department.

“I pride myself on being successful, but this had extra meaning to me,” Mr. Cue added.

Those sped-up negotiations attracted the attention of the government, which filed a lawsuit against Apple and five publishers in April 2012. Mr. Jobs, the co-founder of Apple, died of cancer in October 2011.

Mr. Cue, the highest-ranking Apple executive to take the stand so far in a trial that began almost two weeks ago, mounted a vigorous defense of Apple, which is accused of colluding with the publishers to fix e-book prices.

Through a nearly full day of testimony on Thursday, Mr. Cue denied that he had encouraged publishers to impose a new business model on other retailers, including Amazon.com. Shown a slide displaying what the government has repeatedly called a “spider web” of communications among the publishing executives, Mr. Cue said he did not know that the executives, from publishers including the Penguin Group USA and Simon & Schuster, were talking to one another during their negotiations with him.

“I struggled and fought with them,” he said. “If they were talking to each other, I believe I would have had a much easier time getting those deals done.”

But he also revealed details of an unusually long and close working relationship between him and Mr. Jobs.

Mr. Cue, Apple’s senior vice president for Internet software and services, said he spoke or e-mailed with Mr. Jobs at nearly every step of the negotiations, once calling him on his way to the airport as he left a round of talks with publishers in New York.

In one e-mail, Mr. Jobs questioned Mr. Cue about the fledgling iBookstore. “Are we going to let anyone self-publish? Does Amazon?” he wrote.

“Yes and yes,” Mr. Cue replied.

After publishers signed agreements with Apple, shocking the publishing industry, Mr. Jobs e-mailed Mr. Cue: “Wow, we have really lit the fuse on a powder keg.”

The focus of the government’s questioning turned to December 2009 and January 2010, when Mr. Cue repeatedly flew to New York, met with publishers and tried to reach deals to make their e-books available in the iBookstore on the soon-to-be-unveiled iPad.

For publishers, the appeal of Apple getting into the e-book market was enormous. Amazon, which had introduced its Kindle e-reader in 2007, commanded a 90 percent share of e-book sales at the time. But the default price for newly released and best-selling books on Amazon.com was $9.99, a paltry sum in the publishers’ eyes and one that undermined the value of the authors’ work and cannibalized hardcover sales.

Apple encouraged publishers to switch to a so-called agency model, in which the publishers set the price of a book and the retailer takes a commission. Previously, e-books had been sold on a wholesale model, where the retailer pays the publisher about half the list price, then is free to set another price. The agency model prevented Amazon from sharply discounting the books.

Five publishers — the Penguin Group USA, the Hachette Book Group, Simon & Schuster, HarperCollins and Macmillan — have already settled with the government. But Apple, intent on protecting Mr. Jobs’s legacy, is fighting the charges in a nonjury trial that was expected to last several weeks.

The defense was questioning Mr. Cue when the day ended and he will return to the stand when the trial continues on Monday.

Lawrence Buterman, a lawyer for the Justice Department, occasionally raised his voice while he questioned Mr. Cue for several hours before a packed courtroom presided over by Judge Denise L. Cote.

“Isn’t it true, sir, that throughout your negotiations with the publishers, that you constantly pitched the deal that you were proposing as a way for them to change the entire e-books market?” Mr. Buterman said.

“No, that is not true,” Mr. Cue said.

Mr. Buterman asked Mr. Cue about a previous statement by David Shanks, the chief executive of the Penguin Group USA, that Penguin would only sign a deal with Apple if three other major publishers had done so first.

“Did that strike you as a little bit like, ‘I’m only doing this deal if my competitors do it?’ “ Mr. Buterman said.

“It’s not unusual,” Mr. Cue said. “Nobody likes to be the first to sign. Everybody thinks that you get a better deal by signing last.”

According to Mr. Cue, Apple approached the negotiations with publishers the same way it did with record companies and other content providers in the iTunes store.

After Apple and other retailers started selling e-books on the agency model, prices on many best-selling and new books rose to the $12.99 to $14.99 range, infuriating many consumers.

“Who protected them?” Mr. Buterman said.

“I did,” Mr. Cue said.

“By charging them higher prices?” Mr. Buterman said.

Ireland Defends Tax Laws to Critics at Home and Abroad

There, in the Hollyhill Industrial Estate and elsewhere in Ireland, Apple employs a mere 4 percent of its global work force. But there, too, Apple recorded a staggering 65 percent of its worldwide income — $26 billion last year — enabling the company, according to Senate investigators, to markedly reduce its tax bill in the United States and the rest of the world.

Such arrangements are not uncommon in Ireland, where for years authorities have not only tolerated but encouraged multinational companies like Google, Facebook, Pfizer, Johnson & Johnson and Citigroup to set up shop and provide good jobs, in return for helping those companies pay less tax around the world.

But on Tuesday, as Timothy D. Cook, Apple’s chief executive, found himself on Capitol Hill being questioned about Apple’s tax practices, Ireland came under sharp criticism for its attractiveness as a pied-à-terre for American companies doing business in Europe. At the eye of that storm: a special corporate tax rate of only 2 percent that Senate investigators say Apple worked out with Irish tax authorities.

Carl Levin, the Michigan senator who heads the Senate Permanent Subcommittee on Investigations, said Apple was “exploiting an absurdity” by using three Irish subsidiaries to legally avoid taxes.

The United States Senate is hardly Ireland’s only critic on tax matters. Britain, France and other European Union countries have long been annoyed by Irish policies. During hearings in the British Parliament last week, Margaret Hodge, a member of the opposition Labour Party and chairwoman of the Public Accounts Committee, which oversees taxation, upbraided Matt Brittin, Google’s vice president for North and Central Europe, that the company’s tax practices were “devious, calculated and, in my view, unethical.”

Even before the Senate subcommittee invited Mr. Cook to testify, the British prime minister, David Cameron, declared that the topic would be a focus of the meeting of the Group of 8 richest countries he plans to convene next month at Lough Erne in Northern Ireland.

“We need a truly global solution,” Mr. Cameron wrote in a letter to Herman Van Rompuy, president of the European Council, in April. “As I am sure you will agree, the path to reform starts with the basic recognition that current global tax rules do not reflect the modern and globalized economy that our citizens live and trade in.”

Ireland, with an economy that ranks 47th in the world, is not a member of the Group of 8.

Ireland’s deputy prime minister, Eamon Gilmore, on Tuesday disputed the Senate report’s contention that Apple paid a special rate, saying “Ireland doesn’t negotiate special tax rate deals with any companies.” He said that if Apple was not paying its fair share elsewhere in Europe, the fault lay in “loopholes” in other European countries that make it too easy for companies to avoid taxation.

“That’s an issue that has to be addressed first of all in those jurisdictions,” Mr. Gilmore told reporters in Brussels.

The charge by the Senate subcommittee that Apple avoided paying $44 billion in taxes in the United States by keeping the bulk of its $102 billion cash hoard offshore has struck a nerve here in a recession-racked country where unemployment is 15 percent and the government is looking for ways to repay an 80 billion euro bailout, now equivalent to $103 billion, that it received from the European Union and the International Monetary Fund in 2010.

“There is something wrong with this picture — the revenues of these companies keep increasing while our workers are getting crushed,” said Peter Mathews, a chartered accountant who is also a member of the Irish Parliament for the governing Fine Gael party. “Apple’s cash pile is about the size of our national income. Why not have them pay a 4 percent levy to contribute to our national recovery?”

Apple, which set up its first overseas headquarters in 1980 in Cork to assemble Macintosh computers, has a long history with the Irish. Its 4,000 workers — the largest Apple labor force in Europe — is significant in a country of only 4.6 million people. Apple’s employees assemble iMacs and Mac Pros and are also engaged in research, customer service and other support functions. “Our tax system may be lax, but in exchange we get jobs and more foreign investment,” said Stephen Kinsella, an economist at the University of Limerick who contributes to the influential Irish Economy blog. “No doubt about it, the benefits outweigh the costs.”

Irish politicians through the years have stood behind the country’s official 12.5 percent corporate tax rate, so much so that three years ago when the previous government negotiated the international bailout, it refused to budge when European negotiators wanted to make a higher tax rate a condition for a deal.

Government figures show that in 2010 the effective rate on the gross income of companies here was only 6 percent, and economists say that in some cases — as with Apple — it can go lower than that. That stands in contrast to the effective corporate tax rate in other countries: 29 percent in the United States, 22 percent in Britain, 27 percent for France and 24 percent for Germany.

More than 600 American companies have set up in Ireland, employing 100,000 Irish workers and enjoying the advantages of an English-speaking work force and low taxes.

Representatives of several American companies, including Amazon and Starbucks, have, like Google and Apple, insisted that they comply with the law.

“Apple does not use tax gimmicks,” Mr. Cook told the Senate subcommittee Tuesday.

Under European Union law, companies based in one European country are permitted to do business across the 27-nation bloc, and Internet companies, in particular, use that rule to book their European revenue in the country offering the greatest tax benefits. For many, that is Ireland.

But if Ireland were to change its approach to taxation, other low-tax European countries like Luxembourg and Slovakia would simply take its place.

“Back in the 1970s and ‘80s, when Ireland was a poor state desperately trying to attract investment, tax was a weapon that others weren’t using,” said Richard Murphy, founder of the Tax Justice Network, a group in London that campaigns against tax havens. “So Ireland developed a twofold strategy: low rates and not too many questions. It became the conduit state of choice.”

Landon Thomas Jr. reported from Dublin and Eric Pfanner from Serraval, France.