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Publishers gave Amazon "ultimatum" over e-book pricing: executive

By Nate Raymond

NEW YORK (Reuters) - Publishers gave Amazon.com an "ultimatum" to let them set prices of e-books sold on its website after they reached deals in 2010 to sell through Apple Inc as well, a top executive at the retailer testified on Wednesday.

Amazon could have been barred from selling books for its Kindle e-reader the same day physical hardcovers were released unless the retailer agreed to their terms, said Russell Grandinetti, vice president for Kindle content on Amazon.com.

Grandinetti gave the testimony on the third day of an antitrust trial in Manhattan federal court. The U.S. Justice Department filed a lawsuit against Apple and five major U.S. publishers in April 2012, accusing them of conspiring to fix prices for e-books.

The publishers all settled before trial and together paid $164 million to resolve parallel claims by states attorney general that are also being asserted at trial. Apple, which became a Kindle rival when it launched the iPad in 2010, did not settle.

Amazon, which debuted the Kindle in 2007, controlled up to 90 percent of the market by 2009, court filings show. It was pricing new and bestselling e-books at $9.99, often below cost.

Amazon ultimately switched from the wholesale reseller model, in which it set prices, to the publisher-controlled agency approach similar to the one Apple had adopted in 2010.

In Apple's model, publishers pay the retailer a commission and can set prices of $12.99, $14.99 or more.

Grandinetti said if Amazon could, it would want to sell books for cheaper.

"Certainly if someone offered reseller, we would have taken them up on that offer," he said.

The Justice Department has sought to portray Amazon at the non-jury trial as the central victim of the alleged antitrust conspiracy amid disapproval by publishers of the low prices it was offering consumers for new and best-seller titles.

A provision in Apple's contracts stipulated that if other retailers sold e-books for less, then e-books on Apple's platform had to be the same price.

The Justice Department, which says Apple orchestrated the price-fixing scheme, contends the price parity clause was designed to compel publishers to move Amazon to the agency model.

At the trial, Grandinetti recounted that in January 2010, Jon Sargent, chief executive of the publisher Macmillan, offered him a choice of either moving to the agency model or having to delay selling e-books until after a title's hardcover had been on the market for seven months.

"I think I expressed how unpalatable the choice presented was," he said.

Amazon for a time subsequently pulled MacMillan books from its online store amid the e-books dispute, until finally capitulating and signing a 3-year agency deal, according to Grandinetti.

"We wanted to avoid losing most or all of their titles from our store," he said.

Other publishers soon also sought to move to agency, in moves Grandinetti said Amazon believed were in part intended to "slowdown the success of the Kindle." At times, Amazon told publishers it may need to re-evaluate business relationships, though it ultimately did switch models.

"We were not prepared to sign a contract for whatever length of time where we weren't confident we couldn't be further discriminated against by these publishers," he said.

Two publishing executives have testified so far, both telling tales of tough negotiations with Amazon following their decisions to sign with Apple.

Earlier Wednesday, Simon & Schuster CEO Carolyn Reidy testified that after the CBS Corp unit decided to sign Apple's agency agreement, she called Amazon to say her company would "want to change business terms with them."

Several calls followed with Grandinetti, who she said initially told her he was "not entirely surprised to hear this." In the third call, "he threatened our business," she said.

The other publishers that settled are Pearson Plc's Penguin Group, News Corp's HarperCollins Publishers Inc, and Hachette Book Group Inc.

The case is United States v. Apple Inc et al, U.S. District Court, Southern District of New York, No. 12-02826.

(Reporting by Nate Raymond in New York; Editing by Richard Chang)

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