Apple 2.0

Covering the business that Steve Jobs built

The Apple e-book antitrust trial: Enter Barnes & Noble

June 19, 2013: 7:07 AM ET

As a witness, Theresa Horner was everything Apple could hope for.

Barnes & Noble's Horner.

Barnes & Noble's Horner.

Screen Shot 2013-06-19 at 8.23.37 AMFORTUNE -- Barnes & Noble (BKS), the last of the nationwide brick-and-morter bookstore chains, plays only a bit part in the Department of Justice's antitrust case against Apple (AAPL). It was one of the "other retailers" that, alongside Amazon (AMZN), was forced to change its business model when Apple joined the cabal of book publishers conspiring to raise the price of e-books.

So there was an element of cognitive dissonance Tuesday in the Manhattan federal courtroom where the case is being tried when Theresa Horner, Barnes & Noble's VP of digital content, was sworn in as a witness for the defense and began to tell the court what the e-book market looked like in late 2009 and early 2010 from her point of view.

It was a mess.

Barnes & Noble had put an e-book app on the iPhone App Store that summer as a way to prime the pump before it introduced the Nook, the e-book reader that was to compete with Amazon's Kindle. But it soon discovered that to sell New York Times bestsellers it had to match Amazon's $9.99 price. Because Barnes & Noble was typically paying publishers $13 for the e-book rights to $26 books, that meant it was losing $3 with every sale.

The Nook.

The Nook.

The situation got even worse when the Nook was launched on Nov. 30, 2009 and started selling even better than expected. What had begun as a trickle of money-losing sales turned into a flood. So in early December, nearly two weeks before the team from Apple showed up for its first "meet-and-greets" with the Big Six book publishers, Barnes & Noble CEO William Lynch made the rounds of the same publishing CEOs "socializing an idea" of a new way to sell e-books. "The model needs to change for everyone for this industry to survive," Lynch wrote his executive team.

What Lynch was proposing was to replace the existing wholesale model, which allowed Amazon to set the price of e-books at $9.99, with an agency model, where publishers could set their own, higher prices.

In the government's theory of the case, the agency model was Apple's contribution to the publishers' conspiracy.

But according to Horner's testimony, Barnes & Noble was already planning internally to switch the Big Six to agency before Apple arrived, and that she was under instructions to put those plans into "overdrive" before Barnes & Noble lost even more money.

Moving as quickly as possible, Horner testified, Barnes & Noble prepared agency agreements that, as it turned out, asked for virtually the same terms Apple demanded, including a 30% commission and Barnes & Noble's own version of an MFN -- the "most-favored nation" or price-matching provision that the government has characterized as the linchpin of Apple's illegal plan to force retailers like Barnes & Noble to switch to agency.

Horner testified that she'd read that Apple was also trying to negotiate agency contracts, but that in her talks with publishers Apple was never discussed.

Nobody "forced" Barnes & Noble to switch, Horner told the court. The company was doing it for its own survival. Because once it was on agency terms, she explained, Barnes & Noble would be making $3 on the sale of every $9.99 book, rather than losing $3.

What would have happened to the Barnes & Noble e-bookstore if it hadn't switched from wholesale to agency? Horner was asked over the government's objection.

"We would have struggled to compete on price," Horner replied, "and we would have continued to sustain a lower profit margin on content than we reasonably felt we could sustain."

In its cross-examination, a government lawyer asked Horner if an internal Barnes & Noble memo describing the e-book business as "the future" of the company was consistent with her description of the business as unsustainable. She said she didn't know.

U.S. District Judge Denise Cote, who will decide the non-jury case and usually has a few questions of her own, simply thanked this witness and let her go.

The case is U.S.A. v. Apple. For background, see:

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for

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