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What does that mean? Chapter 11 of the Bankruptcy Code (Title 11, United States Code) is intended to give companies in trouble some breathing space to reorganize themselves and continue in business. Borders has established an "official" website that does/will describe its plans. This proceeding is not what has come to be known as a "prepackaged" bankruptcy — that is, there isn't a substantial plan already in place with substantial agreement between the debtor (Borders) and creditors (its suppliers, landlords, employees... and tax authorities and lenders, who are likely to be the biggest roadblocks). Borders has announced that it will continue to operate its stores as close to as-usual as possible, which may be rather difficult in one important sense: Some publishers had already suspended shipments, so there may be stock drawdown leading inexorably to patron shifts to other stores.

There are also rumored plans to close slightly less than a third of the Borders stores out there, but no announcements yet which stores... except that they'll be the "underperforming" ones. Don't expect to know that for at least four weeks; and even then, it will be part of a plan that must ultimately be approved by the Bankruptcy Court before Borders can leave chapter 11 proceedings... by either emerging "successfully" as a new, reorganizing company, or converting to a liquidation proceeding under chapter 7. This is going to be a fun, high-stakes ride with lots of expensive litigators sucking revenue and assets like nuclear-powered vacuum cleaners.

But what does that mean to me as a customer? It means, largely, business as usual until things change. They will change, but it's much too early to predict how, and in particular how for the store(s) nearest you, let alone when. For the next few weeks, though, you should expect lower stock levels, particularly of backlist titles and outside of top-ten CSAs (that is, NYC, LA, Chicago, DC area, Boston, the Bay Area, Philadelphia, Houston, and Atlanta). This may seem counterintuitive, as the official website claims that "orders after the filing date will be paid in full." The problem is that an order placed today — particularly for backlist material — will take some time to be processed... and vendors will nonetheless be reluctant to ship new material when they're still owed money for old material.

E-book customers are in an odd situation. The Borders "semisponsored" e-reader is the Canadian-owned Kobo, which (at least in theory) should be entirely unaffected by the Borders bankruptcy. Riiiiiiiiight. On the one hand, the Kobo reader does just fine with plain-vanilla EPUB files from non-Borders sources. On the other hand, it doesn't do well at all with DRM-enabled flavors of EPUB files (like the Barnes & Noble variant used on the Nook); it requires significant contortions to work with Adobe Digital editions (and doesn't handle PDF graphics at all); and appears — on the basis of an unscientific sample — to require more tech support inquiries than do its competitors, which may have an adverse impact on a small company linked to a single US vendor. That said, at least the Kobo is not based on a bookstore-managed central bookshelf from which books can be silently deleted, or at least not so annoyingly as is the Kindle.

The biggest worry for customers is going to be which stores close. That largely depends upon how "underperforming" eventually gets defined and implemented. In an area like this one — which is growing much faster than the national average, which contains a Big Ten university, and has two trade bookstores (one Borders, one B&N) serving a much-more-highly-educated-than-the-mean population of nearly 200,000 in this county, but is a hundred miles from the nearest major transshipment point — it's a real worry.

But what does that mean to me as an author? That you're screwed, but you should be used to that by now.

The first thing that you're going to see happen is an increase in the reserve against returns on your next royalty statement. Borders allegedly has about 15% of the market... but its share of returns is much higher, running over 20%. What is most likely is that your reserve against returns will be jacked up by a fifth on the next royalty statement; what might be justifiable is jacking it up by a tenth, but justification for reserves against returns is more than somewhat lacking.

The second thing that you're going to see happen is that some publishers — in particular smaller publishers and those that imposed net-receipts royalty streams — are going to refuse to credit you with all of the sales, claiming (rightly or wrongly) that the sales don't count until they've been paid... and that they're going to have to "adjust" actual sales based on how much they get paid for outstanding invoices. This is a key point for authors near escalator points and at risk from "deep discount" royalty slashes — do not allow the publisher to get away with either

• For "simplicity's sake," discounting the number of copies sold by the proportion it gives up in bankruptcy; that is, treating (hypothetically) 4,000 sales as 3,000 sales because it only got 75% of its invoiced receivables paid. This will not only take you farther away from any royalty-rate escalator, but will be used against you in the next contract negotiation to demonstrate that you had "lower" sales.
• Claiming that the combination of the ordinary trade long discount plus allowing for the virtual "discount" imposed by not having its invoices paid in full means that all sales for the period to/through Borders were "deep discount" sales, and therefore due only the lower rate for "deep discount" sales (usually half, or less, of the regular royalty rate). At present, given typical terms, that means that if rumors start floating that Borders will be paying publishers anything less than about 88% on their outstanding invoices, you should watch for these shenanigans. I consider it extraordinarily unlikely that publishers will get more than 75% on their outstanding invoices; much more than that would not leave Borders with adequate capitalization to continue as a going concern, the goal of chapter 11, and that only if most other classes of creditors agreed to take substantially less than that (and they won't).

  As I read typical trade-book contract terms (I just went through and reviewed a couple dozen different publishers' contracts), this kind of double-application-of-discounts would be inconsistent with and a breach of the contracts. What matters is not the publisher's receipts from sales (except, of course, for net-receipts contracts), but the terms of sale to the end-user — that is, the payor, in this case Borders. Paying less than what is on the invoice is not an alteration of the terms of sale, and therefore it is inappropriate for publishers to treat what they've given up due to the bankruptcy proceedings as a part of the "discount" for this purpose. That's not going to stop them from trying, though; that's precisely what [names deleted to protect the guilty, since there are new CFOs in place since] did when Crown went under.

The third thing that you're going to see happen is some additional pressure on and during negotiations over new contracts, and delays in consideration for books that are "marginal" (for somebody's definition that you'll never see justified). The misbehavior of [publisher's name deleted due to confidentiality requirements] during and shortly after the Crown bankruptcy along these lines is nearly legendary... and noneditorial management at that conglomerate is largely the same now as it was then, so one should expect the same sorts of misbehavior.

In short, this is bad news for everyone who cares about, or earns money from, trade publishing. Ultimately, it's a result of failure to account for the First Amendment rent. Back when Kmart acquired Borders, in the 1990s, Kmart imposed a nearly broken model on Borders (as reflected in Kmart's own bankruptcy a few years later, after it spun off Borders Group but imposed its own managerial personnel and structure on the new entity). The more-subtle effect, though, was that profit, productivity, and performance expectations for the First Amendment activities at Borders were the same as those for all other divisions of Kmart. Nobody really knows how much that "rent" is, or should be... but anyone who pays attention at all (not very many of us) knows that it's a number greater than zero, due to the hidden externality of First Amendment protection for those activities. Another way to look at it is that there is a nonzero cost (a "rent") for the First Amendment's encouragement of a broad range of activities, but nobody at Kmart (or, for that matter, nobody who does financial analysis of publishing and/or the entire entertainment industry) accounts for that cost in comparing the apples of commodity-based business like consumer nondurables (toilet paper, towels, etc.) to the kumquats of the First Amendment (books, magazines, CDs, videotapes, etc.). That failure, in turn, leads to unrealistic expectations and stupid management decisions in an attempt to "catch up" to other business lines.

And thus, we're back to one of the other problems with Borders' management over the years: Ownership/leasing of the stores and the land they sit on. But that's for another time; suffice it to say that outside of New York/Boston/LA/Chicago, the default Borders method is substantially different from the default method of its competitors, both chain and otherwise... and has come around to bite Borders Group in a very delicate portion of its anatomy. Assuming that it has that portion left after having been owned by Kmart, that is. This is the real elephant in the room, and is driving a great deal of the priorities struggle beloved by bankruptcy practitioners... and is well beyond my capability to begin to explain in a blawg entry. Suffice it to say that the people who are ultimately screwing authors the most in this situation are local tax authorities and real-estate speculators, who themselves are under unusually high pressure thanks to the partial bubble deflation in 2007–08.

Labels: civil rights, culture, intellectual property, jurisprudence, politics, publishing