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Posts Tagged ‘Kevin O’Donnell Jr.’
How Thor Power Hammered Publishing
Wednesday, January 5th, 2005
Many of us know that publishing has changed considerably over the last 15 years. More titles see print every year, but the average title sells fewer copies, and goes out of print more quickly, than its late ’70s counterpart. Advances and royalties have dropped in inflation-adjusted terms. More books become insulation and other recycled-paper products earlier than ever before.
Many of us also know that one of the causes of this change was the Supreme Court’s 1979 ruling in Thor Power Tool Company v. Commissioner of Internal Revenue.
Still, over the last 14 years I’ve encountered a number of statements that demonstrate a profound failure to understand either the ruling itself, or its implications for the publishing industry.
The most common such statement says, “Thor Power puts a tax on inventories.”
This is not true. An inventory tax, like a property tax, imposes a certain number of cents in annual tax for every dollar of inventory, regardless of corporate profit or loss.
The Thor Power ruling does involve inventories as they relate to corporate income taxes, but it does not tax inventories.
A Little Background
Companies pay income tax on their profits. Put simply, taxable profits are what’s left after subtracting all legally deductible expenses from gross revenues. The tax that must be paid is a percentage of taxable profits.
Gross Revenues
- legally deductible expenses
------------------------------
Taxable Profits
x tax rate
------------------------------
Income Tax Due
Clearly, higher deductions result in lower profits and, therefore, lower taxes.
One legally deductible expense is “COGS” (cost of goods sold) — the amount the company paid for the items that its customers bought. To determine COGS, many companies use some form of this equation:
Yearopen Additions Yearend
COGS = Inventory + To - Inventory
Value Inventory Value
American tax law lets a company set a dollar value on its inventory of either its actual cost, or its market value, whichever is lower. When the market value of an inventory item drops below its actual cost, the company can “write down” the value of its inventory to reflect the new lower value. This increases COGS, and thereby reduces taxable income.
Let’s put some numbers into the COGS equation. Assume you (1) start the year with $100 worth of goods in inventory, (2) buy $250 worth of stuff during the year, and (3) end the year with an inventory that cost you $200.
Yearopen Additions Yearend
COGS = Inventory + To - Inventory
Value Inventory Value
= $100 + $250 - $200
= $150
Now assume a different set of market conditions. Assume that even though you paid $200 for what you have in your warehouse on December 31, you can only sell it for $150. In this case, the law lets you write down your inventory. Doing this increases COGS:
Yearopen Additions Yearend
COGS = Inventory + To - Inventory
Value Inventory Value
= $100 + $250 - $150
= $200
Because COGS is a legal deduction, increasing it like this reduces taxable income by an identical amount.
Prior to Thor Power Tool, companies would often write down the value of slow-moving inventory, even when its market value had not dropped.
Their reasoning went like this: “We have 100 widgets in inventory. Each widget cost us $2. That sets the inventory value at $200. However, at the rate we’re selling them, we’ll only sell 75 widgets before they become obsolete. So, the real value of this inventory is $150 (75 x $2), because 25 of the widgets have no value at all.”
By writing down inventory, they increased COGS, and thus decreased taxable income.
The IRS did not like this, because lower taxable income means lower tax receipts. The IRS said, “Look, you still have 100 widgets. They cost you $2 apiece. The market value is over $2. Therefore, your inventory is worth $200. We will let you value it at $150 only if either (a) the market value of each widget drops to $1.50 or (b) you throw 25 of the widgets out. You can’t have 75 worth $2 and 25 worth nothing. Period.”
So they went to court.
The Supreme Court’s Decision
“In (Thor Power Tool Company v. Commissioner of Internal Revenue)…the IRS negated Thor’s practice of writing down the value of its spare parts inventory which it held to cover future warranty commitments. Thor contended that, although the sales price on the individual parts did not decline over the years, the probability of all the parts being sold decreased as time passed, and thus so did the net realizable value of the inventory as a whole. The IRS contended that a decline in inventory values for tax purposes must await actual decline in the sales price of the individual parts. The Supreme Court indicated that for tax purposes, the lower of cost or market method was to be applied on an individual item basis and that if no decline in sales price occurred, no loss should be permitted.” (Intermediate Accounting, Kieso & Weygandt, 4th Edition, John Wiley & Sons, 1983, pp. 392-393)
The Aftermath
Most everyone knows that Thor Power has had a major effect on publishing. Unfortunately, too few people know how and why the ruling changed the industry.
The short answer: Thor Power eliminated a tax dodge, and thereby made it more expensive for publishers to carry inventory from year to year. As a result, publishers have cut print runs in order to minimize inventory. They have also become quicker to dispose of inventory — i.e., pulp it — before the end of the fiscal year.
The long answer involves an example. Assume (purely for the sake of using round numbers) a publisher prints 80,000 copies of a book at cost of $1.00 per book. Assume the publisher sells 50,000 copies of that book at $2.00 apiece (we will ignore the problem of returns, here). Assume the publisher pays federal, state, and local income taxes at the rate of 40%. Remember that
Yearopen Additions Yearend
COGS = Inventory + To - Inventory
Value Inventory Value
Before Thor Power, the publisher would have said, “Well, we have 30,000 copies in the warehouse. We’ll never sell those at full price. Some, yes, but we’ll have to remainder some at 50 cents a pop, and we’ll have to pulp the rest. So really, on average, they’re only worth 50 cents each. That’s a year-end inventory value of $15,000.”
Since Thor Power, the publisher has had to say, “Well, we’ve got 30,000 copies in the warehouse. Each is worth a buck. That’s a year-end inventory value of $30,000.”
===========================================
SIMPLIFIED INCOME STATEMENT
PRE-THOR POST-THOR
Inventory
Year Open 0 0
Additions + $80,000 + $80,000
Year End - 15,000 - 30,000
------ ------
COGS $65,000 50,000
Revenues = $100,000 $100,000
-COGS 65,000 50,000
------- --------
Pretax profits = 35,000 50,000
x Tax rate .40 .40
------- --------
Taxes = 14,000 20,000
------- --------
After-tax profits $21,000 $30,000
===========================================
But wait! Isn’t the publisher doing better under the Thor rules? After all, it’s now making $30,000 on a $100,000 investment, whereas before it only made $21,000.
Well…not really. It earns that $30,000 profit only if it manages to sell every copy in the warehouse for $1 apiece. From a cash-flow point of view, that book’s first year looks like this:
========================================
CASH FLOW STATEMENT
PRE-THOR POST-THOR
Revenues $100,000 $100,000
Expenses
Printing (80,000) (80,000)
Taxes (14,000) (20,000)
------------ ----------
Change $ 6,000 0
========================================
In other words, under Thor, the publisher has had to spend $6,000 more in the first year than it would have before Thor. Instead of showing an operating profit, it just breaks even.
On the balance sheet, it looks like this:
=======================================
BALANCE SHEET
PRE-THOR POST-THOR
ASSETS
Inventory $15,000 $30,000
Cash 6,000 0
LIABILITIES 0 0
EQUITY $21,000 $30,000
=======================================
Again, one’s first reaction is, hey, Thor raised the publisher’s equity, so all the shareholders are a little richer. Isn’t this good?
Um…it would be — if it were true. But is it? Can the publisher actually sell all those copies for $1 each? (Maybe.) And even if it can, is $1 received in the year 2000 worth as much as $1 received today? (Absolutely not. Think Net Present Value — or compound interest in reverse.)
From the writer’s point of view, another danger lurks there: One measure that Wall Street uses to judge a company is Return on Equity (ROE — profits divided by equity). If the publisher’s ROE is low, by industry standards, then its stock price goes down. By raising net worth (equity), Thor has forced the publisher to earn higher profits just to keep its ROE (and its stock price) constant. Publishers thus become even more averse to “risky” books — like first novels, or works of high art and low sales.
So how have publishers adapted to Thor Power? By setting print runs closer to the level of advance orders, and by purging inventory. Here’s how the numbers look when a publisher prints 60,000 copies (instead of 80,000) and pulps the 10,000 it couldn’t sell before year’s end:
===========================================
SIMPLIFIED INCOME STATEMENT
PRE-THOR POST-THOR,
FULLY ADAPTED
Inventory
Year Open 0 0
Additions + $80,000 + $60,000
Year End - 15,000 - 0
------ ------
COGS $65,000 60,000
Revenues = $100,000 $100,000
-COGS = 65,000 60,000
------- --------
Pretax profits = 35,000 40,000
x Tax rate .40 .40
------- --------
Taxes = 14,000 16,000
------- --------
After-tax profits $21,000 $24,000
===========================================
By printing fewer copies, and physically destroying any it couldn’t sell, the publisher has locked in a profit of $24,000 and reduced future costs (primarily warehousing, but also including sales, distribution, and accounting). It has sacrificed potential profits, to be sure. On the other hand, it has improved its cash flow:
========================================
CASH FLOW STATEMENT
PRE-THOR POST-THOR
FULLY ADAPTED
Revenues $100,000 $100,000
Expenses
Printing (80,000) (60,000)
Taxes (14,000) (16,000)
------------ ----------
Change $6,000 $ 24,000
========================================
By reducing print runs and inventory, the publisher has deposited an extra $18,000 into its checking account. It has also strengthened its balance sheet with hard cash, as opposed to hard-to-move inventory.
========================================
BALANCE SHEET
PRE-THOR POST-THOR
FULLY ADAPTED
ASSETS
Inventory $15,000 0
Cash 6,000 24,000
LIABILITIES 0 0
EQUITY $21,000 $24,000
========================================
And now comes a real kicker for writers: Because this book is out of print, the publisher has an opening on its list, more cash to invest, and a serious need to replace the steady (if small) income stream that book would have generated. So the publisher must release not only the new title it would have published anyway, but a second new one, to make up for its lack of a backlist.
This results in title proliferation, which itself promotes both lower advance orders on the part of major buyers, and a higher return rate. That means writers must write more, and sell more often, in order to survive.
Is There A Solution?
Although rewriting the tax code to permit writedowns of slow-moving inventory would make maintaining a backlist slightly more attractive to publishers, we cannot return to the old ways. Title proliferation, competition for rack space, and a product life cycle measured in weeks have forced publishers to focus their resources on the future. Only a savage, industry-wide cutting of new releases and strong consumer demand for backlist titles will change things.
I am not optimistic.
____________________
Kevin O’Donnell, Jr. has been selling words since he graduated from Yale in 1972. Periodicals ranging from Alfred Hitchcock’s Mystery Magazine to OMNI have printed more than seventy of his shorter works, a number of which have also been anthologized, both in the United States and overseas. A member of the Science Fiction and Fantasy Writers of America, he has published ten books in America, and has been reprinted in Britain, France, Israel, the Netherlands, Spain, and West Germany.
Copyright © 1993 by Kevin O’Donnell, Jr. First published in the Bulletin of Science Fiction and Fantasy Writers of America, Spring, 1993 (Volume 27, Issue 1; Whole Number 119).
Tags: Kevin O'Donnell Jr., Nuts and Bolts, Thor Power
Posted in Editors and Publishing Houses, Information Center, The Business of Writing | Comments Off
FAQ for Beginning Writers
Tuesday, January 4th, 2005
Q: How do I keep from looking like an amateur when I submit a story?
A: By acting like a professional.
Do your homework. Find out what the editor you are submitting to wants. Let the story speak for itself. Be willing to work with the editor on requested changes. Learn what you can do to make the editor’s job easier. Pay attention to the following:
Do not put extra spaces between the paragraphs (set them off by indenting at the beginning of each paragraph instead). Do not put the creation date on the manuscript, a rights-offered statement, or the Copyright notice (see the question on manuscript format). Do not end the story with -30- (this used to be a telegraphic signal for the end of a message when the message was long, and was later used by journalists–it has no place in fiction).
Do not bind or staple your manuscript. Do not use ring binders, clamp binders, comb binders, brads, string, or any other thing that cannot be easily removed. Paper clips or rubber bands are OK. (See also the question on how to send the manuscript.)
Always include a SASE (self-addressed, stamped envelope) that is large enough and has enough postage. Do not send a letter-sized envelope if you expect to get your manuscript back.
Do not attempt to draw attention to your manuscript by using colored paper or colored ink. Do not use specialty typefaces. Do not put each page of the manuscript in sheet protectors. Do not try to write a “memorable” submission letter. Don’t be cute. Although your manuscript may be funny, its surroundings should not. Gifts for the editor, tie-dyed envelopes, and the like mark your submission as unprofessional.
Making your manuscript appear to be a thing of intrinsic value is a ploy much beloved of unpublished writers. That’s why editors get submissions in safe-deposit boxes, or couriered envelopes, or wrapped in fancy paper, etc. That’s why people worry about the effect of saying that a manuscript is disposable. However, a moment’s consideration will tell you that people like editors, who handle thousands of manuscripts a year, writing on them, copying them, sending them here and there, generally treating them like the pieces of paper they are–don’t place much value on physical manuscripts. The first thing an editor must learn to do is read the =text= and not the packaging. The words and story are the thing, not the frills.
Do not paste pages together, or turn a page upside down, or use any other clever device to find out if the editor has read the manuscript all the way through. Editors have seen these things over and over again.
Don’t ever miss your deadlines, even if the editor says it’s okay. Publishing seems to run on a slower clock some of the time, but when an editor gives you a deadline, that means there’s money involved. People don’t like it very much when you cost them money. If you are going to miss a deadline, please give them at least two months notice.
Don’t be afraid to call your editor or agent to talk about questions or problems concerning business. That’s what they’re there for. They won’t thank you if you don’t tell them about something vital because you didn’t want to bother them.
Remember that editors try to be nice and gentle and may understate things. Don’t take advantage of that. If an editor goes to the trouble of saying something to you, take it very seriously.
Q: Will it really hurt my manuscript’s chances if I don’t format it exactly right?
A: Probably not.
The bare-bones basics of manuscript preparation– double-spaced, right unjustified, margins of about an inch–really covers 99% of getting it right. Many aspiring writers can become a bit obsessive about the minutiae, as if submitting a letter-perfect manuscript format can supplement their stories’ uncertain merits. A perfect manuscript will not save a poor story.
Q: What’s the preferred format for a manuscript?
A: Paper: White 8 1/2″ x 11″ bond. At least 20-pound. Not erasable.
Type face: 10 pitch (12-point) Courier monospace, or other clearly readable face. Not proportionate. Do not use specialty typefaces. If you simply can’t abide Courier, use some other monospaced font. (See question on pitch versus point for clarification.)
Printer: In order of preference, 1) laser printer with fresh toner cartridge, 2) inkjet printer with fresh toner, 3) typewriter with a new carbon ribbon, 4) 24-pin dot matrix printer in near-letter-quality mode with a fresh ribbon. Not draft-quality dot matrix printers with faded ribbons, or anything else that makes the editor’s eyes hurt.
Page format: Double spaced. Indent first lines of paragraphs 3-5 spaces. Do not add an extra line space after paragraphs. Type the manuscript on one side of the page only.
Margins: 1″ to 1.5″ on all sides.
Character and line count: 65-72 characters per line. 25-27 lines per page. Do not justify your lines. Justified left, ragged right is what’s required.
Headers: About an inch from the top. Include your name, the title (or a few words from the title), and the page number on all pages–the page number should go in the upper right corner and nowhere else, but the rest of the format for the header is up to you as long as you have everything there somehow. (Putting the page number anywhere but in the upper right corner makes unnecessary trouble for editorial staff who have to make sure all the pages are there, refer to specific pages in notes and correspondence, etc.)
First page: Include your name, address, phone number, and an approximate word count (but do not put “approximate” by your word count number), on the first page. (See question on how editors count words.) Do not print/type the creation date on the manuscript. There’s no point in telling an editor how long a story has been circulating. SF/F practice is not to put a rights-offered statement on the first page of a manuscript, as in “First North American Serial Rights” in spite of standard writers’-manual advice.
Q: So I should put that in the cover letter instead?
A: No. Don’t put it anywhere. It is not needed. If the editor accepts your work, the contract she offers will tell you what rights she wants to buy. You can negotiate at that time.
Do not include a Copyright notice unless you have specific market information which suggests that such a notice may be appropriate. If the manuscript is disposable, you may put that on the first page. Center the title 10 or 15 lines from the top, put “by” and your name beneath the title, also centered. (Use the name you wish it published under, if different from your legal name.) If this is a title page (a title page is optional but recommended, especially for longer works), start the text on the next page. If this is the first page of the story, skip a line and start the text below your name. This should give you about 13 lines of story text on your first page.
Special characters: Avoid italic typefaces (use underlines instead), bold-face, and other special formats. If you have a long passage that you want printed in italics, you don’t need to underline the whole thing. It’s enough to mark the passage with a vertical line in the margin, write “set in italic” next to the line, and circle the phrase. (Please reconsider having a long passage in italics, though.) Foreign characters are okay, if your printer can do them right. If not, hand-correct them in black ink. Dashes can be indicated by a pair of hyphens. (Do =not= put spaces before and after them. Do it–like this, rather than — this –) Don’t break words at the ends of lines with a hyphen, even hyphenated words. To indicate a line break, you may type the character “#” centered, on a line by itself (or the character “*” or three of them, or you may just leave an extra space–this isn’t crucial to perfect manuscript format). Be sure your punctuation is correct–get a copy of The Chicago Manual of Style or Words Into Type and study it often.
Endings: If you want to let the reader know your story or novel is ended, just center the word “END” in capital letters two lines below the last line of the work. You don’t need to do this, though, since the story should be written so it is clear to the readers when they have reached the end.
Q: What about formatting electronic submissions?
A: For the most part formatting it as a print submission works well, but the preferences vary market by market.
Start by reading the guidelines, some markets don’t allow e-subs at all. Others want them in the body of an email, some attached as a .doc or .rtf, and some have special webforms. The bottom line is that, as with any market, reading the guidelines is extremely important.
Q: Is 12 POINT Courier the same as 10 PITCH Courier?
A: Yes, it works out that way. What the Mac calls “12-point Courier” (measuring by height of character) is 10 pitch, meaning there are ten letters and/or spaces in an inch.
Point describes the vertical height of typefaces in 1/72nds of an inch.
Pitch defines typefaces horizontally, by the number of characters that can fit in an inch. “Point up, pitch across.”
One problem with pitch vs. point is that, if you have a PostScript printer, the fonts on your menu are defined by point size – Courier 10 point, Courier 12 point. But the HP PCL fonts for your laserjet will be given in cpi–characters per inch (=pitch). So if you change the printer selection on your PC from the HP Laserjet III with the Post Script option on, you select Courier 12 point. If you decide to use THE VERY SAME PRINTER BUT WITHOUT POST SCRIPT, you have to choose Courier 10 cpi.
So, pitch = cpi.
It doesn’t help that 12 cpi/pitch = 10 point and 10 cpi/pitch = 12 point, more or less.
Q: How do you correctly package a novel manuscript?
I’m using a box that bond paper came in, but how do I handle the postage and label and wrapping for the return trip? I plan on putting the postage and label in a separate envelope. Will the publishing house use their own wrapping paper, or am I expected to provide a large envelope or something?
A: For the return of your novel, provide a envelope big enough to hold the box your manuscript is in. Put an address label on the envelope, along with the postage.
If you sent your manuscript in one of those heavy-duty manuscript mailing boxes, you can include a return label and postage inside. The publisher will tape the box shut, and apply the label and new postage. Nobody wraps manuscript boxes.
Don’t send the manuscript in a box that is twenty times the size of the manuscript. And make sure the box is easy to open. If you want the editor to use the box to return the manuscript, make sure the box is also easy to seal.
Bubble-pak envelopes are a good choice if you use an envelope.
Jiffy Paks are a royal pain to open (especially when sealed with fifteen heavy-duty staples and five yards of strapping tape) and they tend to cover the innocent editor with clinging gray fluff.
Tyvek envelopes seem to result in very battered manuscripts which are harder to page through. Particularly when a 250-page manuscript is left loose in a Tyvek envelope the size of a small desktop, as seems to happen constantly.
Office Depot (and probably lots of other places) has quite inexpensive manuscript boxes that you fold up, nice and sturdy and easy to use; all the editor has to do to return the ms is paste on a new label which you can provide. (Return postage could be included in a labeled envelope taped inside the top). No gray fluff, easy to stack on a desk, and a nice neat manuscript both ways if such should be the writer’s fate.
Another possibility is to use those corrugated cardboard manuscript boxes. Affix the return postage and address on the box, then wrap it in brown postal wrapping paper and address the whole thing to the publisher. That way, all the publisher has to do to return it is pop it back in the box, seal it up and drop it in the outgoing mail. Keeps the manuscript presentable enough to go out again, as well.
Do NOT submit your only copy.
Do NOT send by mail formats that require the recipient to sign for delivery (such as registered or certified mail or return receipt).
Do NOT use metered postage for your return postage. Use stamps. The post office will not accept outdated metered postage, and you won’t get your manuscript back.
Q: Do you need to include a cover letter when you send in a manuscript?
A: There are several reasons why an editor would want a cover letter:
It has the author’s name, address and phone number on it, along with the name of the story. It’s a good place to make notes about the story and the editor’s reaction to it. If the editor decides to acquire the story, it is also a good place for notes about the offer. And it is used to draft a rejection letter if the editor doesn’t buy the story. A cover letter just makes it easier to keep things straight when an editor is dealing with dozens of manuscripts.
You definitely need a cover letter to tell the editor if you are making a simultaneous submission, or if the manuscript is disposable (in which case, the SASE only needs to be a standard letter-sized envelope).
This material was developed as a service to writers by members of GEnie’s Science Fiction Roundtable, many of them professional writers and editors. Contributors include James Brunet, John C. Bunnell, Gregory Feeley, Larry Hammer, David M. Harris, Glenn Hauman, John E. Johnston III, Tappan King, Damon Knight, James D. Macdonald, Beth Meacham, Kevin O’Donnell Jr., Elizabeth Perry, Susan Shwartz, Martha Soukup, Judith Tarr and Mitch Wagner.
It was compiled by Kathleen Dalton-Woodbury. Copyright © 1994 by GEnie Information Service. All rights reserved.
Tags: beginners, Beth Meacham, Damon Knight, David M. Harris, Elizabeth Perry, Glenn Hauman, Gregory Feeley, James Brunet, James D. Macdonald, John C. Bunnell, John E. Johnston III, Judith Tarr, Kathleen Dalton-Woodbury, Kevin O'Donnell Jr., Larry Hammer, manuscript, Martha Soukup, Mitch Wagner, Susan Shwartz, Tappan King, writing
Posted in Advice for New Writers, Manuscript Formatting | Comments Off