Online and brick-and-mortar book retailer Barnes & Noble shot a massive hole through the Department of Justice's ebook price fixing case against Apple on Tuesday. When Theresa Horner, B&N's Vice President of Digital Content, took the stand she told the court her company was already negotiating agency pricing deals with publishers before Apple was on the scene in hopes of killing the profit losses it was suffering at the hands of Amazon.com.
Retailers and publishers keep chipping away at the DOJ's price fixing case against Apple
While the DOJ characterized Apple as the ringleader in a conspiracy with book publishers to artificially raise prices by forcing an agency pricing model retailers, Ms. Horner's testimony told a different story. She said her company had been in talks with publishers ahead of Apple's negotiations, and those deals were essentially the same as what landed the iPhone and iPad maker in court.
Apple, along with Penguin, MacMillan Simon & Schuster, HarperCollins, and Hachette Book Group were all accused of conspiring to push ebook prices higher by forcing retailers into using an agency pricing model. The agency model lets publishers, instead of stores, set book prices. That, coupled with Apple's contract clause blocking other retailers from selling ebooks at prices below the iBookstore's prices, landed the company in court over DOJ accusations that the deals ultimately forced retailers into charging more.
All of the publishers eventually settled out of court instead of taking their chances at trial, leaving Apple to stand alone insisting it did nothing wrong.
Amazon was using the traditional wholesale model to buy and sell books, which gave the online retailer the ability to sell at a loss and undercut its competition. Those lower prices at Amazon were at the root of the problem Barnes & Noble was trying to deal with: bleeding money by selling ebooks at a loss just to compete.
According to Fortune, Barnes & Noble was paying US$13 per book, but lost $3 on every sale to match Amazon's $9.99 prices, so CEO William Lynch decided it was time for a change if retailers were to compete: the agency pricing model.
Mr. Lynch proposed the idea to publishers, complete with requirements that it could match other retailer's prices to avoid getting undercut, in December 2009 — a couple weeks ahead of Apple's own negotiations. Not only did those talks predate Apple's own negotiations with book publishers, they showed that Apple didn't start the move to agency pricing since other retailers were already working on similar deals.
Barnes & Noble isn't the first company to offer testimony that helps Apple's case. Penguin CEO David Shanks backed up Apple in court when he said the company seemed indifferent to the ebook market and was willing to walk away if it couldn't strike deals with publishers, which doesn't sound like the move a company hell-bent on forcing new pricing on book retailers would make.
Evidence has surfaced showing Amazon was negotiating the same agency-based pricing deals with publishers, too, and those contracts also included the same price matching terms found in Apple's, and Barnes & Noble's, deals.
That's a strikingly different picture than the DOJ has been painting. According to the government's case, Apple spearheaded a conspiracy with publishers to artifically raise book prices and steal away Amazon's market control.
With more than a week's worth of testimony and evidence so far, the DOJ case against Apple isn't looking as strong as it implied — at least from outside the courtroom — leaving a few questions:
With the strong case Apple is presenting, plus the testimony from publishers and retailers, why did Penguin, MacMillan Simon & Schuster, HarperCollins, and Hachette Book Group all settle out of court? Presumably because even the slightest chance that they could lose posed an unacceptable financial loss. There could also be a missing piece of the story we don't know about that publishers didn't want to risk exposing.
Amazon was signing the same deals with publishers, too, so if agency pricing contracts with lowest price matching clauses are cause to bring Apple into court, why hasn't Amazon been treated the same?
Unlike TV shows and movies, surprise evidence typically doesn't happen in real courtrooms. Knowing executives from publishing companies and retailers were taking the stand means the DOJ most likely had a pretty good idea what they would say. If so, how could the DOJ think moving forward to trial was a good idea?
As the case stands now, it feels more like the DOJ has been trying to support Amazon's monopoly while crushing any chance of competitors getting a foothold in the ebook market. Amazon has been pretty successful so far at controlling online book prices. Other retailers have been forced to sell at a loss to compete, and that's what pushed publishers and companies like Apple and Barnes & Noble to look to agency pricing as an alternative.
The DOJ, however, says Apple and the publishers wanted to force customers into paying more than they were for books. Before the trial started, Jodge Denise Cote said she thought the DOJ had a strong case against Apple. I wonder how strong she thinks that case is now.