Apple’s Watergate?

Over forty years ago, on October 20, 1973, embattled President Richard Nixon responded to a subpoena for information by his own Special Prosecutor Archibald Cox by refusing to comply with the order. He then fired Cox, and accepted the “in protest” resignations of his Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus, in what became known as the Saturday Night Massacre.

Nixon’s decision galvanized popular opinion against his use of political power during the Watergate affair. However, because he resigned and was pardoned before he could be tried in a court of impeachment, the American judicial system never addressed and resolved the following question: could a United States President legally avoid complying with his own official’s oversight orders by firing that very official?

A similar question about business corporations is now being adjudicated by the American legal system. Last October, Apple agreed to settle a governmental anti trust case about its e-book pricing practices by accepting a court appointed compliance monitor.

But Michael Bromwich, the compliance officer, has ruffled the feathers of Apple’s executive officers, who accuse him of conducting “adversarial, inquisitorial, and prosecutorial communications and activities.” Recently, the firm won an administrative stay from Bromwich’s oversight, pending further appeals.

But let’s consider Apple’s legal stance for a moment. Adversarial, inquisitorial, and prosecutorial activities? Isn’t that the type of behavior that should be expected from a court appointed compliance monitor?

Nevertheless, Apple believes that such behavior is inappropriate; it is attempting to dismiss its own compliance monitor. Forty years after Watergate, the courts may finally have an opportunity to opine on the legality of such actions.

If you were hearing this case as a member of the judiciary, would you rule in favor of Apple?

Digital Books Project: Orphans Slay Google!

Google is usually able to defeat, or at least survive, the challenges that confront it.

Online searches? No problem! Google long ago surpassed all of its rivals in terms of market share, and more recently survived Microsoft’s roll-out of its snazzy Bing service.

Mobile phones? A piece of cake! Despite the powerful competitive presence of Apple’s iPhone, Google’s Android system reigns as the market share leader of that sector as well.

Global geopolitics? Even there, Google has managed to survive its ongoing tussles with the Chinese government. Recently, it successfully shifted its search servers to Hong Kong in order to avoid the threats of censorship and online surveillance.

But in Google’s most audacious project of all, its efforts to digitize all of the books of the world’s greatest libraries, the firm met its match last week. Surprisingly, it was stopped in its tracks by a group of orphans.

The Books Library Project

Google’s mission, as it declares on its Corporate Information web page, is “to organize the world‘s information and make it universally accessible and useful.” Its flagship search engine certainly achieves this goal for information that the world places on public web pages, but until recently it had no ability to reach and organize the material in paper books and records.

To address this need, Google launched its Books Library Project, a venture undertaken with Oxford University, the New York Public Library, and a wide array of similar institutions. Its goal is to scan all of the world’s literature into a vast online data base, making millions of books searchable through the internet. But the publishers of the books howled, complaining that Google and its library partners has no right to scan their copyrighted works into privately owned computer servers.

Google appeared to reach agreements with the world’s major book publishers several years ago, promising to restrict the ability of online search users to seeing just a few snippets of book text, and establishing a policy for sharing revenues from book sales. But early last week, a judge tossed out that agreement in order to protect the rights of a group of orphans.

Down The Food Chain

Interestingly, the judge’s decision appeared to address a glaring oversight in Google’s digital book strategy; namely, that the firm failed to reach all of the way down the food chain of copyright ownership. In other words, although Google managed to develop agreements with the publishers of the books and the libraries to which they were sold, it appeared to forget that an additional group actually controls the copyrights to many of the world’s published works.

Who is this party? Collectively speaking, they are the original authors of the works. Although many publishers develop “work for hire” agreements with writers that assign control over all copyright issues to the publishing entities, others permit writers to continue to control their copyrights in perpetuity. For such works, author permissions need to be obtained before copyrighted works can be scanned into (and then distributed through) Google’s new digital medium.

The publishers do have the ability to reach out to all known authors and obtain their requisite permissions before finalizing their arrangements with Google. But they have no way of doing so for books that were authored decades ago by writers who later died without leaving clear trails about the individuals who inherited the authors’ rights under copyright law.

The book industry refers to such works as orphan works because they are, from a legal perspective, left without legal owners (or “parents”) when their authors pass away. The judge ruled that Google cannot digitize the entire collections of the world’s great libraries unless it tracks down the heirs of the copyrights of each of these works, an activity that is pragmatically impossible.

No Signs of Surrender

It is difficult to believe that Google will simply close down the project, considering its track record in conquering far more daunting obstacles. Indeed, its Books Library Project home page shows no signs of surrender, indicating that the firm will likely search for a strategy that can satisfy its legal constraints.

For instance, some legal experts believe that all orphaned works should be made widely available on a non-exclusive basis after publishers make reasonable efforts to search for copyright heirs. Such an act would address the court’s concern about the legal privileges of the private owners of copyrighted material, particularly when such individuals cannot be located easily. It would also enable other digital service providers to compete with Google in the market for digitized works.

At the moment, there is no indication that Amazon, Apple, and Barnes & Noble are about to jump into the fray. Nevertheless, with customers of the Kindle, the iPad, and the Nook continually searching for content to peruse on their e-book readers, it may not be long before Google confronts a wide new array of challengers in this sector.

Apple and Random House: New Partners

Show us a publisher that is clinging to a traditional business model, and we’ll show you one that is embracing the future.

Consider the newspaper industry, for instance. The Christian Science Monitor, a global paper that first emerged in 1908 (when the cursed Chicago Cubs last won baseball’s World Series), recently abandoned its daily subscription edition and adopted a continuous 24/7 cycle of free online postings. On the other hand, Rupert Murdoch‘s The Daily continues to cling to a daily delivery, subscription based business model, even though its deliveries are made electronically via Apple iPads.

Likewise, consider the magazine industry. The venerable Time continues to promote its glossy national news weekly as its flagship publication. But its traditional rival Newsweek is about to be relaunched as a companion product for the web-only The Daily Beast, and The Atlantic (which was created in Boston in 1857 as a literary journal) has been reborn as a Washington-based home of political bloggers.

And what of the book industry? Until this past week, five of the “big six” book publishers had embraced Apple’s new business model for e-book sales via its iPad tablet. But Random House, the largest book publisher of them all, valiantly refused to sign on to Apple’s new business model …

… until Steve Jobs prepared to take the stage to introduce the snazzy new iPad 2.

Wholesalers and Retailers

Traditional retailers such as Barnes & Noble and Borders usually purchase their merchandise from publishers at wholesale prices and then mark up (or discount) their customer retail prices to whatever the market will bear. This model tends to serves both entities well; after all, publishers can restart their printing presses whenever new orders arrive from retailers, and can generally rely on wholesale revenues to cover their operating costs. And retailers can respond to variations in market demand by modifying their retail prices, thus maintaining some control over their own revenue streams.

Apple, however, insisted on a new business model for e-books when it introduced its iPad last year. Instead of paying publishers for distribution rights up front and then managing the retail prices that are charged to retail customers, Apple negotiated retail prices with publishers up front and then agreed to share customer revenues on a 30 / 70 basis. In other words, Apple abandoned the retailer’s traditional right to discount book merchandise, while avoiding the concomitant cash flow burden of paying wholesale prices up front to acquire products for resale.

Most publishers, lusting after the promise of future profits from e-book sales on Apple iPads, simply fell into line and acquiesced to Steve Jobs’ demands. But Random House initially refused to do so; it insisted on withholding its e-books from the iPad retail platform. This past Thursday, though, Random House finally lost its nerve.

Agents and Partners

Steve Jobs made Random House’s commitment about the iPad a key part of his splashy introductory public demonstration of the iPad2. Many believe that Apple was feeling pressure to make the iPad 2 as attractive as possible, given the flood of competitor products that are now challenging the iPad for supremacy in the tablet market. Thus, Apple arguably needed Random House as much as the publisher needed the technology firm.

It wasn’t clear, however, who would blink first in the weeks leading up to the iPad 2 announcement: Random House, the only holdout publisher from the iPad platform because of its dissatisfaction with Apple’s 30 / 70 business model, or Apple, a vendor that was competing with the Amazon Kindle and other e-book readers. Apple was arguably in a difficult position, not being able to offer readers the written works of President Barack Obama, John Grisham, and other famous authors publishing under the Random House umbrella.

Ultimately, it was Random House who blinked first; it simply agreed to accept Apple’s standard contract terms. The industry is now referring to those terms as an “agent model” because Apple has become a sales agent of the publishing houses, compensated on a commission basis. In other words, Apple has forced its content producers to accept it as a junior partner on all book sales.

Back From The Dead?

Interestingly, as new book publishers and online retailers settle their differences and adapt to the emerging environment of e-books, some tiny independent booksellers – written off as relics of a bygone age just a few years ago – are learning to survive by trading used books, staging community events, and selling ancillary merchandise. Apparently, the challenges faced by traditional book stores like Borders and Barnes & Noble are creating market space for small and nimble competitors to establish their own strategic niches.

As long as reading remains a hobby, a pastime, and an avocation for millions of American bibliophiles, there will always be publishers and retailers to serve them. Nevertheless, with the rise of the agency model, the distinction between the producers and the purveyors of written material will likely continue to blur.