Tuesday, July 21, 2009

Hammered by Thor

Once upon a time in Washington (it was 1979), the United States Supreme Court decided 439 U.S. 522, Thor Power Tool Company v. Commissioner of Internal Revenue. In a nutshell, the Supreme Court decided that the Commissioner didn't abuse his power by denying Thor Power Tools a write-down of "excess" inventory. As a result, book sales for midlist authors (i.e. most of you, gentle readers) have suffered ever since.

Wait, what?

For an in-depth treatment, I'll direct you to Kevin O'Donnell, Jr.'s excellent article on the subject, but what happened is this: in the 1970s, Thor had a bunch of inventory that they were having difficulty moving. All companies—Thor included—pay income tax on their profits, which they pay after making all legally deductible expenses from overall revenues. One way, then, of increasing overall profitability is to pay income tax on a smaller percentage of gross income. Thor decided to do this by increasing their deduction in one field, cost of goods sold (COGS).

Now, there are legal ways of doing this. Say you have $1000 worth of inventory in your warehouses, but by the time taxes are due, the market value of said inventory has dropped to $800. The IRS will let you write down the value of your inventory, i.e. pay taxes on the lower of the two numbers (in this case, $800 instead of $1000). By the end of the 1970s, however, businesses had started writing down the cost of inventory that hadn't yet realized a drop in market value; in the above example, it would be as if your inventory were still technically worth $1000, but you knew (based on the rate you were selling it) that you would only sell 800 units at $1.00 per unit before Inventory 2.0 would come out, rendering your current merchandise obsolete and unsalable. Before Thor v. Commissioner, you could claim $800 in inventory due to slow rate of movement (ROM) and not due to actual depreciation in value; after 1979, you couldn't.

Now, as you may know, the book industry operates in two weird ways. One, it automatically renders huge quantities of its stock obsolete (i.e. hardcovers) every year by printing trade paperback/mass market editions, and two, it allows accounts to return unsold stock to publishers for full credit if those accounts can't move their inventory.

You might already see the problem: each year, thousands upon thousands of books are returned to their respective publishers, generating high levels of nigh-unsellable inventory at their warehouses. Because publishers can no longer write down the cost of their inventory based on inability to sell, they have to do one of two things: remainder the books, i.e. sell them for pennies on the dollar in order to get rid of them, or pulp (destroy) them. (This is the case for hardcovers and trade paperbacks; mass market editions are generally stripped. In case you were having a good day thus far, please note that 40% of books suffer this fate.)

Because publishers lose money on returns/remainders/pulping (and face losing even more money if they don't do this), they compensate by ordering smaller initial orders than they used to and allowing titles to go out of print faster. For a midlist author, this means fewer copies of your book are sold/shipped to stores and remain in print for less time than they would have pre-Thor. While there are potential missed sales here, the publishing houses generally come out on top by doing this, whereas most midlist authors get the hammer.

I've said it before and I'll say it again: I don't want to discourage you from writing or make you cry yourselves to sleep at night. I just want to help you figure out what you're up against in this crazy industry. At this point, we've been operating under the post-Thor tax code for thirty years; there's no going back, and I'm honestly not sure there's a way to remedy the problem of smaller initials and shorter shelf life across the board. Any ideas you might have, however, are (as always) more than welcome in the comments.

23 comments:

  1. Well that stinks. This whole publishing business just gets better and better, doesn't it?
    But I do thank you for the excellent perspective. Better to be shocked now than later.

    One thing you didn't point out in your post though is that getting your books bought is not impossible. And it does have some shelf-life and is in print for a while. Thus, it's not impossible or the ugliest it could get. It's just little worse than before. Well, maybe a lot worse.
    Changes in the gradient I can stand. It's when the little slidy arrow on the bar gets set all the way to the left that I start to worry.

    Question: Do you think the publishing industry IS at its worst for authors? How could it be worse if it's not? I'm interested to hear your perspective.

    ReplyDelete
  2. Just _two_ weird ways?

    Is it true that salespeople in publishing don't work on commission? I've heard rumors to that effect. If it is true, how many industries work that way?

    And returns, yeah. That's unique to publishing, isn't it? But how about this one: an industry in which basically -everyone- (myself included) ferociously supports a government program that buys one unit of their goods, then freely shares that unit with as many people as want it? Musicians get money every time their song is played on the radio, but authors get nothing with every book lent. (And that's the way I like it, barring so much money for libraries that they can afford a penny in royalties every time a book is checked out. And free unicorns.)

    Can you imagine if the government ran a free _car_ rental business?

    Of course, that's all beside the point. Just my personal rant this morning.

    The only partial solution I've seen, which doesn't directly address much of this: unionization. Like the screenwriters. This might have a few beneficial effects. Like the WGA, the union could establish a minimum advance. If it was at some pretty modest level--say $10,000--that would still force publishers to only buy books for which they had some minimum level of passion and support.

    Suddenly, only half as many books (or whatever; I've no idea as to the precise numbers) would be published--and those would get twice as much editorial and marketing effort. (Well, in theory.) How many novels are published a year? 50,000? If there were only 25,000, we'd still have plenty.

    And of course these days there are plenty of places to publish the novels that aren't offered $10,000, for those who are motivated more by the moonspun purity of the perfect word than by filthy lucre.

    JR

    ReplyDelete
  3. Hi Eric,

    First off, thanks for doing this post. It's informative as always. Second, how much time in this Mjollnir*-affected era does that lower in-print life translate into? Two years? Three? Five?

    Reesha -- I agree with you completely about preferring to be shocked now rather than later. This way we know what we're getting into.

    * Yes that is actually the name of Thor's hammer. I know way too much Viking myth for my own good.

    ReplyDelete
  4. Hi Reesha--

    The industry's not quite at its worst for authors. Authors are usually advanced more money than their books actually earn (roughly 75% of titles don't earn out) and when they get royalties, they get more money per copy than the house or the bookseller (the author gets about three times what the bookseller or publisher gets).

    So yes, it's bad for authors, but it could be worse.

    ReplyDelete
  5. Of course there is a solution. e-Books. Never out of print, always available instantly on demand. It's the future regardless of how you feel about that book store on the corner. There will always be a market for antique books, I suppose.

    Alternately, I can imagine some intermediate step to prevent this inevitability for ten or fifteen years: a book store which has, in place of that back storeroom, a printing service able to print 50 ppm in a variety of formats, including full color dust jackets. If you're romantic enough, you can imagine they will print a wide variety of samples to occupy the book shelves -- placement paid for by 'publishers' marketing dollars, of course.

    Take a book to the counter for purchase, and the point of sale system triggers the printer in back to replicate a copy for immediate replacement. And if you want a book they don't stock on the shelves, well wait 5 minutes and an attendant will bring it to you personally.

    ReplyDelete
  6. Hi JR--

    1. Yes, it's true we're not paid on commission. Including the book industry, the number of industries that engage in this practice is (to the best of my knowledge): 1.

    2. I'm also fairly certain the idea of returns is also unique to publishing.

    3. According to Bowker, 175,000 new titles were published in 2003. This is a big number, but nowhere near the number of people who are trying to get published.

    I'm interested in your idea of unionizing, though. Food for thought/blog.

    ReplyDelete
  7. I don't know that the libraries/royalties thing is a very good example. Libraries also lend music CDs and DVDs and they are not (and should not be) required to pay royalties on those as well. If libraries are forced to pay out royalties, then they will simply buy less books which doesn't help the publishing world at all. I think the way a writer needs to look at it is, people reading free library books have the potential to become fans that will then buy future books. It's all about the exposure. It's not an ideal situation.

    As authors there isn't a whole lot we can do about the situation. So, instead of wasting time whining and complaining, we should probably just figure out how to write books so wonderful there will be no remainders, or at least keep dreaming of such a perfect day.

    ReplyDelete
  8. Hi Matt--

    It really depends on the book; some are in print for a year, others are in print for decades. I'll try and look up some average stats for you, though.

    ReplyDelete
  9. Hi Kirk--

    I agree, more or less, but it's really a question of how long the transition will take. E-readers are still prohibitively expensive for a lot of people, and there will always be those who are confused by the new technology (or simply prefer physical books).

    ReplyDelete
  10. Alissa:

    Oh, I by no means -want- libraries to pay royalties. (Except in a perfect world where strawberry-scented unicorns frolic in chocolate waterfalls, and libraries are bursting with funding.) I love and adore libraries. I'm just saying that it's another difficulty that is (almost) unique to this industry.

    We've got:

    1) retailers who don't buy product, but instead basically borrow it from manufacturers.
    2) annual planned obsolescence of our flagship product, as Eric mentions above.
    3) a sales force that does not work on commission.
    4) a government program in every town in the country that gives our product away for free.
    5) Dan Brown slinking into bookstores and stealing my sales while the clerks' heads are turned.

    Frankly, it'd be a miracle if any industry of which those things were true was in -good- shape! And they were all true before the Great Recession.

    So for me, as someone who makes a living at this, all this doom and gloom--er, I mean all this _accuracy_--isn't so bad. It's never been easy, at least not for a guy who writes well but is nobody's idea of a genius. All I can do is keep writing, to the limits of my meagre talent, and keep editing and polishing and re-writing. Exactly the same as last year, and five years ago, and ten. So maybe editors take longer to get back to my agent. They were never quick. Instead of waiting three months, I'm waiting six. Okay, seven ... and counting.

    But ... eh. What else am I gonna do? -Work-?

    And thanks for the response, Eric. 175,000 books a year. But only 10,000 of them are novels! That's only 27 a day. A mere trickle, he said, sobbing.

    I do wonder about the unintended (and unfortunate) consequences of unionization--but I definitely see some serious benefits. My agent gets worked up because he thinks that the twenty best-selling authors (of whom he represents a few--myself emphatically not among them) could basically dictate terms, and change the industry. But they're the ones for whom the current system is working wonderfully ...

    JR

    ReplyDelete
  11. Seriously, don't you think eBooks and the EBM are going to cause a major shift in this dynamic? We could be looking at a radically different landscape in as little as five years. And I think it will be one that is a little more favourable to authors, provided they keep an eye on their out-of-print clauses. Bring it on!

    ReplyDelete
  12. Fifteen years ago I worked as the returns person at a major book chain (Crown Books, before it was steamrolled by B&N). I would go into different stores and clean up their returns piles for them.

    The amount of mass markets I stripped was unreal, and honestly most of them were by big name authors, because the stores (or reps) had ordered too many of them in anticipation of glory.

    Those, by far, made up the highest percentage of the waste (in my own admittedly teensy tiny experience). Hardback returns to imprints were much smaller--and again, the biggest boxes I filled tended to be too many copies of a larger title, which had been over ordered. I rarely saw large quantities of midlist titles get returned or stripped. This was 15 years ago though.

    ReplyDelete
  13. "I'm also fairly certain the idea of returns is also unique to publishing."

    Wrigley's does it with chewing gum too. Though I doubt they are anywhere close to the 40% of books....(!)

    ReplyDelete
  14. Depressing, but informative.

    And is anyone else horrified at the mental image of all those books being pulped? Argh!

    ReplyDelete
  15. I'm interested in what Godfrey said about most of the returns being the big name authors. Granted it was a while back but still.

    Are the big book chains partly responsible for all this?

    ReplyDelete
  16. I feel like e-books and e-readers could change this buisness model. I rarely buy a book that isn't on my kindle anymore, it is more convenient and easier to travel with.

    ReplyDelete
  17. I definitely agree with Janet and Jeff that ebooks is going to change things, but I'm not so enthusiastic. It's going to make things better, sure, but better for authors? Mmm I think publishers will benefit more, though there may be some piece of the pie for authors. I mean, lower cost means lower price (someday. This 10$ can't last, really, can it?) but if I were a publishing house I'd be keeping more of that cut than I'm giving away--I doubt the royalty rate increases and a 10% royalty on $5 (the randomly picked lower price) is only 50 cents compared to a paperback's 80 cents. Not even considering hardcover, better hope that lower price means 30-40% more books sold...

    On top of that, I think publishers may be more apt to take on more books if they don't have to waste paper, so more competition for marketing dollars and readership.

    But, hey, what do I know? As a writer I have to envy your enthusiasm and assume the future's bright. Hope is what we writers are good at.

    ReplyDelete
  18. @Kirk -- that on-demand, in-store printing press already exits:

    http://www.ondemandbooks.com

    I've heard a lot about how returns work in publishing. I confess that no matter how many details I learn, it doesn't make any sense to me. Did the publishing industry not go through Just In Time delivery like every other material goods industry I can think of?

    There just has to be a better way out there that works for all parties involved.

    ReplyDelete
  19. On the issue of library loans, is there no equivalent of this in the US?

    http://www.plr.uk.com/allAboutPlr/whatIsPlr.htm

    I receive a small four-figure sum every year from this scheme, which makes libraries doubly lovely in my eyes.

    Also, won’t POD dramatically reduce the amount of pulping that goes on?

    All those trees!

    ReplyDelete
  20. Anon at 1:35:

    In the US we lack that system so emphatically that I actually clicked around the website, suspecting a spoof.

    "PLR is funded by the Department for Culture, Media and Sport and in 2008-09 received £7.4 million pounds in grant-in-aid, of which £6.6 million was distributed to authors. Funding for 2009-10 has been set at £7.5 million."

    Of course, living in the US, I'm not getting that money from the UK versions of my books! I might move to the EC, just so I'll be eligible.

    At least we don't have nationalized healthcare here. That would -really- suck for an author without a day job. I don't know how you live with that crappy NHS. They know me by name at the local emergency room, sucker!

    Also: I recently read that France gives musicians a monthly stipend, so long as they perform a certain number (30-50, if I remember) of gigs per year in qualified venues.

    Maybe what publishing needs is better lobbyists.

    JR

    ReplyDelete
  21. Thor is vastly overrated, and it's also thirty years old; it has roughly as much effect on modern publishing as the Hawley-Smoot Tariff.

    First, no inventory manager would be happy with even as low as one turn a year, so the idea that books would sit around for years and decades is outdated, at best. No one manages inventory like that, in any industry.

    And print runs are higher now, by a substantial amount, than they were in 1979, because the publishing business is much, much larger.

    Thor is the excuse the ex-midlist writers of the late '70s give for the death of their careers; ex-'80s midlist writers blame ordering to the net, and ex-'90s writers Amazon. And they all blame the death of the independent stores. But that doesn't mean any of it is true.

    ReplyDelete
  22. Well, but what about the list at 12:18, Andrew, that some guy named JR wrote? Those are my excuses, and I'm sticking with 'em.

    And how much higher are print runs? There were 220 million people in the US in '79. There are 303 million now. So there oughtta be some natural expansion, no?

    ReplyDelete
  23. Any ideas you might have, however, are (as always) more than welcome in the comments.

    Heh, elect federal politicians who are for less government instead of more? :D

    ReplyDelete