Apple 2.0

Covering the business that Steve Jobs built

In a coda to the Apple e-book trial, Barnes & Noble drops Nook HD

June 25, 2013: 12:43 PM ET

Squeezed by Amazon, the No. 2 maker of e-readers is exiting the color tablet business.

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The Nook HD.

FORTUNE -- If Apple (AAPL) manages to win U.S.A. v. Apple, the e-book antitrust suit that closed last week, it will be thanks in large part to the testimony of Theresa Horner, Barnes & Noble's (BKS) vice president of digital content.

It was her story about what the e-book market looked like to Barnes & Noble in late 2009 and early 2010 that gave Apple's defense team one of its strongest arguments.

Barnes & Noble had put an e-book app on the iPhone App Store that summer as a way to test the market before it introduced the Nook, its answer to Amazon's (AMZN) Kindle.

But it soon discovered that to sell New York Times bestsellers it had to match Amazon's $9.99 pricing. Because Barnes & Noble was typically paying publishers $13 for the e-book rights to $26 books, that meant losing $3 with every sale.

Barnes & Noble's Horner.

Barnes & Noble's Horner.

The situation deteriorated after the Nook was launched at the end of November and started selling even better than expected. What had begun as a trickle of money-losing sales turned into a flood. To save the company, Barnes & Noble came up with the same business plan -- the so-called agency model -- that landed Apple in the middle of a federal antitrust suit.

"If you're arguing to me now that Apple did something illegal," the judge asked U.S. attorney Mark Ryan during the government's summation, "why have you not argued to me as well that Barnes & Noble did something illegal?"

Why indeed?

The 90% market share in e-books Amazon enjoyed before the Nook and the iPad arrived, has been reduced, according to testimony at the trial, to 60%, with Apple and Barnes & Noble splitting the difference.

But with Amazon pricing e-books even more aggressively, that wasn't enough to save the division that made the Nook HD.

On Tuesday Barnes & Noble reported a net quarterly loss of $118.6 million and announced that it was getting out of business of manufacturing color tablets.

It will continue making black-and-white e-readers, but will license the rights to build the color Nook to any third-party manufacturer that thinks it can make a go of it.

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

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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 Fortune.com.

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