

How a 1979 Supreme Court hammered book publishing - dsr_
http://www.sfwa.org/bulletin/articles/thor.htm

======
hncommenter13
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.

------
gioele
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).

~~~
glhaynes
_• «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
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.

~~~
Turing_Machine
Exactly, and even if you could do that, where would you set it up? Even the
largest bookstore has limited floor space, and that's not even considering
those small convenience store spinning racks and the like.

Ebooks are roughly 50-250 KB in size. Figure out how many of those you could
fit on a hundred buck TB drive. :-)

~~~
Ein2015
[http://www.wolframalpha.com/input/?i=1+terabyte+%2F+50+kilob...](http://www.wolframalpha.com/input/?i=1+terabyte+%2F+50+kilobytes)

[http://www.wolframalpha.com/input/?i=1+terabyte+%2F+250+kilo...](http://www.wolframalpha.com/input/?i=1+terabyte+%2F+250+kilobytes)

So, between 4x10^6 and 2x10^7.

------
earino
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
What company is it that you work for?

~~~
jseliger
I was just going to ask the same thing.

------
advisedwang
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!

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

------
albion_tourgee
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.

------
tzs
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
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.

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

------
tstegart
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.

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

~~~
protomyth
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.

~~~
glhaynes
POD seems to give up some of the main exclusive features that remain to
physical books: high quality of layout, printing, binding, etc. If I'm just
gonna get a poor quality physical book out of the deal, 9 times out of 10 I'm
gonna just go with an ebook instead.

~~~
earino
i work for a POD manufacturer and I have to tell you, for a very large segment
of the printing industry, the last 12-24 months have seen a shift where POD
may have higher quality standards than traditional offset. inclusion of full
color full bleed printing, etc... and the quality is there. are all POD
providers doing this? no. but the standard is being set very high.

~~~
tsotha
The price, too. The last POD book I got cost me $127 plus shipping.

~~~
earino
My goodness gracious!!! What book was this?!?

~~~
tsotha
[http://www.amazon.com/RIGID-AIRSHIP-TREATISE-DESIGN-
PERFORMA...](http://www.amazon.com/RIGID-AIRSHIP-TREATISE-DESIGN-
PERFORMANCE/dp/B004Q2I53W/ref=sr_1_1?ie=UTF8&qid=1328691775&sr=8-1)

You could pick one up used for a mere $213.50. I got a deal :)

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

~~~
dangrossman
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...](http://www.ipcc.ch/pdf/assessment-
report/ar4/wg3/ar4-wg3-chapter9.pdf)

------
solson
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
> 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.

~~~
solson
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.

------
Zigurd
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.

