How a 1979 Supreme Court hammered book publishing

http://www.sfwa.org/bulletin/articles/thor.htm

by dsr_ • 14 years ago

51 40 14 years ago

tstegart3• 14 years ago

The author is not optimistic about the future at the end of his post, but don't digital books solve this problem? They are never sitting around in a warehouse. At the very least, they will change the equation.

bhewes2• 14 years ago

Not only digital books, but Print-On-Demand books as well. POD is just-in-time inventory.

protomyth3• 14 years ago

This is actually the direction I wish B&N (and perhaps Kodak) had gone. POD would be perfect for a large bookstore chain because they could print a book in the back room staying with the instant gratification theme of a store.

gioele2• 14 years ago

It is interesting to note how many of the variables in these equations are no longer relevant when you deal with electronic books.

* «We have 100 widgets in inventory», you have one file copy,

* «a publisher prints 60,000 copies (instead of 80,000)», you still have only one file copy,

* «this book is out of print», files do not go "out of print",

* «dispose of inventory -- i.e., pulp it --», physical books have another counterpart: they are paper that can be sold, this has no parallel for electronic books,

* «competition for rack space», there is no rack space to compete for (there is competition for attention, that that is the same for every sellable thing).

bhewes2• 14 years ago

If I am not mistaken the publishing has continued to grow since the orignal writing of this article (1993). Things changed, but it was not killed.

glhaynes2• 14 years ago

• «competition for rack space», there is no rack space to compete for (there is competition for attention, that that is the same for every sellable thing).

I'm not sure I see the difference.

guns• 14 years ago

There is no opportunity cost for putting a digital book on the "shelf".

Alternately, you must build a rack a mile long to offer the same breadth of selection.

protomyth3• 14 years ago

> there is no rack space to compete for (there is competition for attention, that that is the same for every sellable thing).

So, how much is the front page of Amazon worth or the featured section of the iBooks store, since that is the digital equivalent of the front of store in B&N?

gioele2• 14 years ago

> > there is no rack space to compete for (there is competition for attention, that that is the same for every sellable thing).

> So, how much is the front page of Amazon worth or the featured section of the iBooks store, since that is the digital equivalent of the front of store in B&N?

That is what I was referring to as "competition for attention". You can only suggest or push a limited number of items but this is different from competing for rack space: you just cannot afford to have on your rack all the books you could sell. You must also choose how many copies of each book you should put on the shelves. All these aspects are no longer relevant when you are selling "bags of bits".

CamperBob• 14 years ago

Frankly, it's a pretty goofy article. The variables it cites aren't even relevant for printed books. If the Thor decision had an impact on publishing, it was to encourage faster turnaround at the printing facilities and development of just-in-time processes across the whole industry, from acquisition to retail.

It is very hard to argue that anything has actually gotten worse as a result of Thor, from the perspective of authors, publishers, retailers, or consumers.

Zigurd• 14 years ago

This is only true for publishers that are making large numbers of hard-back books for an uncertain market.

Trade paperbacks are going print-on-demand, and e-books have overtaken print books in some categories already.

When is the last time you heard anyone boast "I'm in my fifth printing?"

So, while this puts some inefficiency and perverse incentives into part of the publishing industry, the effects of this have been washed out, in most cases, by technological change and changes in the supply chain.

HZBooks• 14 years ago

Has anybody ever calculated the "carbon footprint" and other environmental issues of paper vrs digital delivery of reading material?

dangrossman• 14 years ago

Paper production is the most effective man-made carbon sequestration method we have. We're growing forests, which pulls massive amounts of CO2 out of the atmosphere, then storing it in paper and lumber that isn't likely to be burned and put back into the atmosphere any time soon.

The Intergovernmental Panel on Climate Change said "In the long term, a sustainable forest management strategy aimed at maintaining or increasing forest carbon stocks, while producing an annual sustained yield of timber, fibre or energy from the forest, will generate the largest sustained mitigation benefit".

http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-cha...

tzs• 14 years ago

Unless I'm totally misunderstanding the numbers, Thor looks like a good thing. Pre-Thor, publishers printed much more than they could sell. Post-Thor, that is a bad approach. They come out better if they do a better job of not going to far over.

sunir• 14 years ago

The downside is that it diminishes the economic value of titles with long trailing demand, so books go out of print faster.

This reduces the economic value of copyright as well because although the publisher has a monopoly right to print and distribute the work, it has lost the economic incentive to make the work available; yet no one else can either.

earino7• 14 years ago

Very few things are really "going out of print." Almost everything is going POD.

Avshalom• 14 years ago

Not more than they could sell, more than they could probably sell in a financial year because distributors were willing to hold on to stock longer.

That said I don't have any real objection to the SC's ruling.

advisedwang• 14 years ago

Another point to notice: we have new printing techniques! Smaller runs can be more cost effective with new digital printing that has less one-off cost.

The author neglects one factor which is especially salient given the above - if a publisher finds a book is selling they will go for a second print run to milk it!

earino7• 14 years ago

Or they'll send it to a print-on-demand provider who does just in time inventory / drop shipping.

earino7• 14 years ago

The company I work for does print on demand. Copy count of 1, for all book types. Perfect, case, stitched, BW, halftone, color. The world of printing books is dying, and POD is there to pick up the slack... until even POD dies because eBooks won.

wtn• 14 years ago

What company is it that you work for?

jseliger• 14 years ago

I was just going to ask the same thing.

earino7• 14 years ago

Lightning Source

hncommenter13• 14 years ago

This analysis misses a few things:

1) Most significantly, we're looking only at the tax view and for only one year. Companies typically keep two sets of related financials: "book" and "tax." The "book" financials are on an accrual basis (for most companies), which means that expenses are matched with income according to the period in which they occur. The tax books are kept on a cash basis, meaning that they look at what cash came in and out in a given period.

What is happening here is that the book and tax results are temporarily diverging (quite common) because they treat this item differently, with the payments to the IRS creating a deferred tax asset that will ultimately reverse.

Specifically, for "book" or financial reporting purposes, the inventory is carried at $0.50, reflecting its current value. For tax purposes, however, that is disallowed. As a result, the company pays more in cash to the IRS this year (as the post describes).

What it misses, though, is that this situation will reverse in the next period, when the company will owe less tax. (For financial reporting purposes, it would record the tax payment as a deferred tax asset on its balance sheet.)

Now move forward a year. When the inventory is sold off at $0.50, it produces no profit on the financial books: we held it at $0.50, and we sold it at $0.50. On the tax side, however, we held it at $1.00 and sold it at $0.50, generating a loss that will reduce our cash tax bill. As a result, the deferred tax asset (the money we paid to the IRS as a result of the higher cash profits in the prior period from not writing down the inventory) will reverse, and we'll pay less taxes.

This is a bit complicated, but the basic idea is that the post is misleading: because it only looks at one period, we see the publisher paying more in taxes in the first period, but we don't see the reversal where the publisher pays less tax in the second period.

2) Publishing is actually better off than most industries here, because a) books are cheap to manufacture relative to other, more complex manufactured items; b) Nobody sells books for $2 that cost $1 to print. In the real world, the slight change in inventory holding costs has a lesser impact on the cash taxes paid by the publisher when books that cost $1 to print are sold for $10 or $20, even if some are pulped at $0.50. In other words, this is a bigger deal for industries other than publishing, as publishers can sell their products for quite a bit more than they cost to manufacture (as is true of many IP products).

3) From an economic profit view (ignoring accounting), nobody wins when items are manufactured and written off as unsold inventory. The incremental tax expense in the first period from temporarily paying higher taxes on a higher inventory value is swamped by the overall profitability improvement of not printing books that never sell. No matter what industry you're in, unsold inventory represents a loss.

4) Printing fewer items means less cash is tied up in inventory. This is a huge benefit to the company's overall economic profit and return on assets, as having cash tied up in unsold inventory carries financing costs and results in lower return on equity.

5) This long trip into accounting-land has nothing to do with the fact that ebooks are a damn sight better for many reasons, even if they upend the publishing industry in its current form.

albion_tourgee• 14 years ago

Umm, this posting was written in 1993. Actually a totally different publishing world than today's. As some comments point out, it's pretty questionable to claim that allowing tax writedowns that favor overproduction of a product is actually favorable to the industry. But, none of this stuff applies at all to ebooks or to print-on-demand publishing, either. So even with print books, if they're print on demand (aka digital short-run), the whole question of inventory write-down is irrelevant because there isn't any inventory. But the main thing is, even if this stuff was important in publishing circa 1993, which is open to question, hopefully if you're in publishing today you're not stuck in a 1993 business model, because if you are, you have more problems than could fit in this particular tax loophole.

solson2• 14 years ago

Inventory is a liability, not an asset and the tax code should reflect that. Taxing unsold inventory is simply one more thing that creates an unfair legal advantage for internet delivered content over traditional print content.

The government should not attempt to even the playing field by clamping down on technology and the internet. Instead it should eliminate taxes on unsold physical inventory and eliminate retail sales taxes and retail property taxes.

anamax• 14 years ago

> Instead it should eliminate taxes on unsold physical inventory

As the article says, Thor wasn't about tax on unsold physical inventory.

The company had inventory at cost $X. It decided that said inventory was worth $Y, for X>Y and tried to write off X-Y as a loss. The IRS said that the company's reason for deciding that the inventory was worth only $Y was bogus.

solson2• 14 years ago

Yes it is a tax on unsold inventory. If I spend $100 on inventory, my business has $100 less cash. IRS rules do not allow my business to write off that cost until the goods are sold (COGS). If I do not sell that inventory, the IRS treats the unsold physical inventory the same as $100 cash for tax purposes, however my $100 is gone and I have no customers, so unless I destroy my inventory, I have to come up with tax payments for $100 I already spent. I've witnessed retailers smashing mass amounts of merchandise in compactors to avoid taxes on sunk cost. Some publishers have incinerated train loads of books for the same reason. Unsold inventory is a liability... Regardless of what the IRS says, inventory isn't worth anything until someone pays you for it, and you can never be sure if anyone will pay you for it or exactly what the price will be until the transaction occurs.

How a 1979 Supreme Court hammered book publishing

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