Nook Media v-p of digital content Theresa Horner took the stand on Tuesday at the Apple e-book price fixing trial and the government and Apple clashed over questions about the profitability—or lack of it—in the e-book market of 2009-2010. Horner responded to questions about the launch of the B&N e-bookstore and the Nook digital reader in late 2009; she was joined by expert witnesses, economists Ben Klein and Michele Burtis, who answered questions—and fended off vigorous counter arguments from the government—about the economic impact of the agency model and the MFN on the overall e-book marketplace.
Under questioning from the government, Horner described the circumstances surrounding the launch of the B&N e-bookstore in July 2009 and the debut of its Nook digital reader later that year. The government was determined to show that B&N had switched to the agency pricing model for e-books in 2010 without any of the troubling issues surrounding the iBookstore launch, probing whether B&N had “talked about negotiations with other publishers,” or engaged in “price fixing,” or “asked other publishers to help you get agreement,” or “asked publishers to move other retailers to agency,” or “acted as a go-between for other publishers,” according to questions put to Horner. But Horner also described a marketplace dominated by Amazon and a B&N e-book store (B&N returned to e-book retail in 2009 after abandoning the market in 2004) struggling to compete on price with Amazon’s $9.99 e-book benchmark pricing for bestsellers and some new releases.
She also detailed e-mails from B&N executives Steve Riggio and William Lynch in early 2010 offering a “new economic model,” the agency model, a model they were anxious to discuss with publishers and quick to embrace. While the government seemed concerned about differentiating the B&N e-bookstore launch from the controversies around the iBookstore and agency, Apple counsel focused on the economic pressures facing B&N in a market dominated by Amazon’s practice of selling some e-books below cost. Apple focused on a B&N internal document on e-book pricing that described competing on price—selling e-books at a loss—as “the cost of doing business.” Under questions from Apple counsel Horner said B&N went from matching some of Amazon’s prices to matching almost all of them, “we perceived that consumers thought our prices higher so we looked at matching Amazon,” Horner said. The result, Horner said under guidance from Apple questioning, “was negative profitability on e-books,” noting also that the successful launch of the Nook device in 2009 only exacerbated the losses, “because while we sold more content, it grew the losses.”
Apple’s lawyer Orin Snyder has focused on showing that Apple’s moves to launch the iBookstore with the agency model and an MFN—considered key to the price fixing conspiracy—were “rational business decisions,” very much like the decisions that B&N made upon entering the e-book market. Indeed Horner said, B&N was very happy to switch to the agency model—with an MFN— “in 2009, trying to forecast our content sales over the next 12 months we saw that the current content revenue model was not acceptable. We were losing money on certain titles and the more consumers bought them the more money we would lose.” B&N also wanted to avoid windowing—“we felt it would inhibit digital reading,” she said—and jumped at the chance to go agency. She said B&N could make a profit on a 30% commission and with no discounting under agency. “The more you sell under agency your profit is consistent,” she said. Indeed, she said, “agency allows us to have competitive pricing,” and described the model as “a level playing field.” And when asked by Apple what would have happened if B&N had stayed on the wholesale model, she said “we would have struggled on price and generated lower profits on content than we could reasonably sustain.”
While Apple made its points, Horner’s testimony showed again more dubious publisher behavior, including at least two houses acting in concert to pressure B&N over the e-bookstore’s relationship with Random House which had not switched to the agency model along with the rest of the Big Six. Both Penguin CEO David Shanks, another Penguin executive and a Macmillan executive both complained to B&N about displaying Random House books in promotional advertising. An e-mail from Penguin complained that RH wouldn’t “move to a model where retailers can raise prices” and complained that “our efforts are not appreciated by the biggest publisher in the market.” Apparently B&N's Lynch responded to Penguin in an e-mail, “you won’t see another ad with Random House titles in them.”
Nevertheless Apple appeared to hit a sweet spot with Horner’s testimony, focusing on what a “rational” business venture had to do to enter the e-book marketplace in 2010—drop the wholesale model like a hot potato and switch to agency if you expected to have a chance. This became an even bigger issue when expert witnesses Ben Klein and Michele Burtis took the stand. An economist and Apple expert witness, Klein offered what appeared to be a hypothetical study with the not-so-subtle-title, The Apple MFN Did Not Compel Publishers To Move Amazon to Agency, that he claimed calculated the economic impact of the MFN on the bottom line. He said it was very small, “less than 1%.”
But it was the testimony of Apple expert witness and economist Burtis, who produced a study that looked at the impact of agency on the overall e-book market over a 2 year span claiming that agency had reduced overall e-book prices. Previously, government witness economists Richard Gilbert and Orley Ashenfelter had offered testimony that agency had increased e-book prices in the immediate aftermath of agency and had also suppressed e-book output at the five publishers that switched. They also criticized the Burtis report as flawed. The government bore down on her testimony with a flurry of contentious questions aimed at undermining her results. The government even got Burtis to admit that prices “immediately” after agency were higher than those “immediately” before agency. Burtis acknowledged that her study “did not control” for factors besides agency—such as the explosion of low-cost self-published e-books from Amazon, B&N and other platforms—or other “confounding” factors that may have also been responsible for bringing e-book prices down over time.
However before Burtis could even begin testifying, the trial came to a halt in a dispute over the pricing and the profitability issue, spurring a three-way conference between Judge Denise Cote, Apple and the government over the issue of profitability. At one point the government objected to a section of Burtis’s study that offered a short three sentence opinion on the overall profitability of B&N’s current e-book business (as opposed to profitability of select new releases sold at $9.99 in 2010). Apple believed the short passage was instructive about the business climate surrounding entering the e-book market while Cote was adamant that the court was not going to get involved in determining a business’ overall profitability.
“The government believes Apple should have formulated some other model than agency or stayed on the wholesale model to enter the e-book market,” Apple’s Snyder said emphasizing that this was at the heart of Apple’s defense. “B&N was losing money on wholesale and adopted agency with great enthusiasm,” Snyder said noting that B&N’s profitability was “central,” and emphasizing “whether anyone entering the market would rationally choose the wholesale model.”
But Judge Cote said, “this is not a trial about the profitability of the e-book business,” and eventually ruled against Apple, forcing a focus on a narrower concept—the profitability of e-book bestsellers in 2010—but Apple had made its point. Apple, Snyder said, made an independent business decision to “adopt a rational business model, not create a model simply to conspire to raise prices,” when it entered the e-book marketplace. “Apple was intent on entering a market in a legal and profitable manner,” he said, “and other smart and sophisticated people came to the same decisions as Apple did.”
Burtis is first up on the stand on Wednesday.