Jun

13

2011

The Myth of the Unearned Advance

by Steve Laube

A common myth permeating the industry is that a book is not profitable if the author’s advance does not earn out. I would like to attempt to dispel this myth.

First let’s define the term “Advance.” When a book contract is created between a publisher and an author, the author is usually paid an advance. This is like getting an advance against your allowance when you were a kid. It isn’t an amount that is in addition to any future earnings from the sale of the book. Instead, like that allowance, it is money paid in advance against all future royalties, and it must therefore be covered by royalty revenue (i.e. earned out) before any new royalty earnings are paid.

The advance is usually determined by a series of assumptions that the publisher makes with regard to the projected performance of each title. The publisher hopes/plans that the book will earn enough royalty revenue to cover the advance within the first year of sales.

A NY Times essay a couple years ago casually claimed “the fact that 7 out of 10 titles do not earn back their advance.” Of course they did not cite a source for that “fact.” But I have seen it quoted so often is must be true! (and it isn’t.) The implication then is that a book isn’t profitable if it doesn’t earn out its advance. The publisher overpaid and has lost money. The author is the happy camper who is counting their cash gleefully celebrating the failure of their publisher to project sales correctly.

Let me try to explain why that isn’t always true. And to do so means we have to do math together. This may be a little complicated, but realize that these calculations are critical and each publisher runs these kind of scenarios on your books. To dismiss this conversation and claim you “don’t do math” is to ignore the lifeblood of your profession.

Realize that this is a generic model. Each and every number below fluctuates from title to title. That is the weakness of the exercise, but bear with me.

Assumptions:

Advance paid to author: $10,000
Retail price: $13.00 (paperback)
Net price: $6.50 (this is what the publisher receives when they sell the book – to dealers, big box retailers, distributors, etc. )
Copies sold: 10,000

Scenario one: Author earns 14% of net for each book sold. ($6.50 net x 14% royalty x 10,000 sold)
Thus, after selling 10,000 copies the author has earned $9,100.
Leaving $900 of the advance unearned.

Scenario two: Author earns 16% of net for each book sold ($6.50 net x 16% royalty x 10,000 sold)
Thus, after selling 10,000 copies the author has earned $10,400.
The publisher writes a royalty check to the author for $400. The amount above the original advance.

The myth says that scenario one equates a failed and unprofitable book , while scenario two is a profitable book.
But wait! Let’s do some more math.

New Assumptions. (remember these are all estimates based solely on this scenario.)

BOTH scenarios have the publisher making the same amount of revenue. ($6.50 net x 10,000 sold.) Both scenarios generated $65,000 in net revenue for the publisher.

To determine profitability we have to subtract costs.

Fixed costs

Editorial expense: $8,000 (includes all stages of the editorial process)
Design (typesetting/cover): $4,000
Printing and warehousing:  $15,000 (the approximate cost of printing 12,000 copies)
Marketing and PR: $10,000 (an average of $1 per book)
Administrative costs: $13,000 (20% of the net revenue)
Advance paid to author: $10,000
TOTAL COSTS: $60,000

Profit for the Publisher: $5,000 (or 7.7% of revenue before tax)
or the $65,000 in revenue minus the $60,000 of total costs.

Are you with me so far?

Now watch this.

Scenario one – (with the unearned advance still on the books) has a profit of $5,000 for the publisher.

Scenario two – (pays the author $400 for earnings beyond the advance) has a profit of $4,600 for the publisher.

In this comparison it is the book that didn’t earn out the advance that actually makes more money for the publisher!

Why? Because scenario one pays a lower royalty per book sold. The advance itself has NOTHING to do with it. The advance is a fixed cost that is covered by the revenue generated by the publisher.

_____

Pause and reflect on that for a moment.

_____

The advance is a cost of acquisition. If that cost of acquisition in the above scenario were $50,000 of course neither scenario would have been profitable because sales would not have been enough to cover all the costs. And it is likely, if there was a $50,000 advance, the publisher would have spent more on marketing and PR.

So this is not an argument for bigger advances. Instead it is an attempt to show, albeit using controlled statistics, that an unearned advance does not necessarily equate the failure of a book!

So when is a book profitable if there is a bigger advance?

Let me do one more set of numbers to illustrate:

Assumptions:

Advance paid to author: $75,000
Retail price: $13.00 (paperback)
Net price: $6.50
Copies sold: 45,000
TOTAL REVENUE ($6.50 net x 45,000 sold.) = $292,500.

Fixed costs

Editorial expense: $8,000
Design (typesetting/cover): $4,000
Printing and warehousing:  $55,000 (the approximate cost of printing 50,000 copies)
Marketing and PR: $75,000
Administrative costs: $58,500 (20% of the net revenue)
Advance paid to author: $75,000
TOTAL COSTS: $275,500

Profit for the Publisher: $17,000 (or 5.8% of revenue before tax)

If you are an experienced person from the publishing side of the table it is obvious that this is a very generic scenario that has only an echo of reality. For example, the net revenue for a publisher is usually less than the 50% of retail that I used above. That is because distributors and specialty vendors (like the book racks you see in the airport) command a much higher discount off the retail. Thus the true picture is highly complex. And we don’t even touch on ebooks or ebook sales or royalties here. This exercise is merely to show a business model where the advance is a fixed cost. Not a cost that has to be earned out for the book to be profitable.

In the above case, a book with a $75,000 advance makes money after only 45,000 copies are sold.

So what do you think? Is the math realistic? Does it make sense? What are the implications (either to the publisher or the author)?

 

 

 

 

 

 

 

47 Responses to “The Myth of the Unearned Advance”

  1. Kristina Miranda June 13, 2011 at 5:32 am #

    For the first time I finally understand the system. Thanks Steve for explaining the myth. It takes some of the fear out of the process. Great post!

  2. Sandra Ardoin June 13, 2011 at 8:13 am #

    “In this comparison it is the book that didn’t earn out the advance that actually makes more money for the publisher!”

    I’ve never seen that spelled out so clearly. Thank you, Steve. That part did make sense. In this case, I guess it would take some pressure off the writer who thinks she must at the least earn out the advance to have an opportunity to work with that publisher again.

  3. Heidi Kortman June 13, 2011 at 8:21 am #

    Thank you for the clear explanation.

  4. Ronie June 13, 2011 at 9:26 am #

    I have to say I felt both great relief yet great pressure reading. And of course, all the numbers melted my brain, but I am encouraged that perhaps…just perhaps…I’m doing okay. I would love to be doing better, but then again, wouldn’t we all?

  5. Ann Shorey June 13, 2011 at 9:37 am #

    Thanks for the clear explanation, Steve. It’s useful to know the background of the publishing/royalty process.

  6. Michael K. Reynolds June 13, 2011 at 10:58 am #

    Well done Steve!

    What a helpful glance under the hood of the publishing industry. Numbers of this sort seem to be stowed away in a mystical lockbox out of some sacred regard for the profession. But for those of us yearning to understand the business details of this mad pursuit, these kinds of posts are most welcome.

  7. Jessie Gunderson June 13, 2011 at 11:23 am #

    I had a much longer comment but apparently, though I though I understood the math above, I can’t add 14+14 to pass the spam test. :) I’m going to have to save my comments from now on just in case.

    Thanks. This post helps clear up some of the mystery.

    Clear as mud. How’s that for a million dollar phrase? Oh dear, I’m on a roll. Ha!

    • Steve Laube June 13, 2011 at 12:37 pm #

      Sorry Jessie. When we turned off the “spam test” our blog was hit by nearly 50 spam bots in an hour. So bear with us as we try to make sure human beings are commenting here. (Though some may question the humanity of literary agents…)

  8. Shannon Dittemore June 13, 2011 at 11:30 am #

    I’m so new to all this! It’s amazing how the picture changes when you see the numbers in black and white. I appreciate the exercise, Steve. Kinda regretting my lack of attention in math class.

  9. Teddi Deppner June 13, 2011 at 12:08 pm #

    I do tend to be one of those creative types who wants to ignore this topic because “I don’t do math”. So I’m glad you encouraged types like me to read on anyway.

    Being someone who (at the moment) stands on the fringes of the publishing industry and watches it only as a learning exercise, I find it astonishing how differently each player defines the success or failure of the book. To a publisher, the success of the book is in terms of the bottom line profitability to the publishing company. To an author, the success of the book could be in terms of how much advance they got, or in terms of how much the book earns them over a period of 10 years. OR an author may consider a book a success if they get ten (or fifty or just two) letters that say, “You changed my life.” (Yeah, I’m one of those touchy-feely types, myself.)

    As an entrepreneur and small business person (I’ve been in the web design and Internet consulting business since about 1996), I find the idea of turning the control and the lion’s share of the earnings from my work over to some big company highly distasteful. Yes, I know! This has been the reality of the publishing world for centuries! That doesn’t mean I have to like it. In the past, it DID mean that I had to accept it, embrace it and learn its rules if I wanted my books to be a “success” — or to be published at all!

    So I’m loving these insights from someone “in the know”, Steve. Busting the myths of the publishing world is so helpful to those traveling that road!

    Meanwhile, I’ll keep pursuing my dreams of connecting with my niche audiences online and publishing my own work (both in print and electronically). In some ways, it’s not even the same industry, not the same business at all. The tools, the audience, the scope and the players involved are all different. But the core of what I do is bring a message (or a story) to those who want to hear it. I’m excited and passionate about the way I do it, just like you are about the way you do your part.

    I hope authors and creative people everywhere are beginning to understand that there are many paths to many kinds of success. Not all of them lead to blockbuster, million-dollar success — not even the road that led *someone else* to that sort of success. Just be true to what your heart longs to create and keep exploring ways to get your creations into the hands of those who want/need them.

    And think deeply about how you personally define “success”. Just like we saw in this article, it might look different than you first assumed.

  10. John Green June 13, 2011 at 12:10 pm #

    Anytime an author gets close to earning out, a publisher makes money. But many books don’t come close to earning out, because the emphasis is so strongly on the kind of blockbusters that have much more attractive per unit cost.

    So what your fixed math fails to acknowledge is that printing 1,000,000 copies of a book is significantly cheaper per unit than printing 1,000 copies of a book. So the more copies of a title you sell, the more profitable per unit it becomes.

    Also, you say a publisher is more likely to spend a lot of marketing money on a book they pay a lot for; that’s broadly true, but only up to a point: Eventually, big blockbusters begin to sell themselves (a la Stieg Larsson) and/or the work of marketing is taken up by Hollywood.

    So THOSE books are incredibly lucrative, which means that publishers don’t want to miss them, which means they’re willing to vastly overpay for something that MIGHT become the next big thing. But they’re also quite quick to cut their losses once they realize a book *won’t* become the next big thing, which is why so many novels have six-figure advances and four-figure sales.

    I continue to believe that publishers rely on blockbusters (and backlist) to remain profitable and that most frontlist titles lose money (although I think it’s a narrow majority). Of course, it’s impossible to know for sure, since not even publishers themselves have a particularly good handle on their data.

    I agree, though, that things turn profitable for publishers more quickly than they let on (which is one of the reasons that real revenue sharing is not particularly attractive to them).

    • Steve Laube June 13, 2011 at 12:43 pm #

      Good thoughts John. But this wasn’t an exercise to show all the subtleties of publishing economics. Yes there is significant savings in printing costs on long press runs. But it is incremental.

      Plus a publisher rarely prints a million copies or even 100,000 at a time, unless it is a blockbuster. Many years ago when “In Search of Excellence” was a runaway seller, the publisher was ordering a new print run each day. They were afraid the bubble would burst and they would be left with a warehouse of unsellable books.

      This happened to the publishers of “Out of the Blue” by Orel Hersheiser. They printed a slug of hardcovers and then the sales fell off the end of the table when the next baseball season began and his streak ended. Some point to that as one of the things that contributed to that publisher’s demise.

      It is absolutely true that publishers rely on blockbusters to remain profitable. No question. But that is another question for another day.

  11. Michelle June 13, 2011 at 12:24 pm #

    Those royalty percentages are rather high. A new and even midlist author can’t expect to make nearly that good a rate, though obviously it depends on the publisher. Honestly, in a case like this where the information is primarily geared toward unpublished or new writers, that creates an unrealistic expectation.

    I’d suggest crunching the numbers again at a more realistic royalty rate, then let authors see what is more likely to happen.

    Your equations also don’t reflect that standard rolling royalty rates, ie smaller for the first 10,000 copies, then increasing incrementally as more copies sell. Something as high as 14% or 16% would most likely be the rate AFTER they’ve sold at least 10,000 copies, if not more.

    While I applaud you for showing these calculations, I’d suggest using a low-ball figure that hits more closely to reality.

    • Steve Laube June 13, 2011 at 12:35 pm #

      Actually Michelle those royalty percentages are not high at all. 14% and 16% are very middle of the pack. That is my experience as a literary agent! :-) If an author signs for less then they should talk to a good literary agent.

      And putting in escalations and other variations misses the point of the exercise. I was not trying to create a real-time model per se. I was trying to show that the idea of an unearned advance equals a failure or unprofitable book.

      Note the qualifiers throughout the post. Accounting in publishing, as in all business, is not a static thing. Each book has it’s own nuances.

      The bottom line I was attempting to communicate is that earning out doesn’t necessarily equal success.

      • Michelle June 13, 2011 at 12:44 pm #

        Just looked at the list of books you represent and I realize why there may be discrepancies in our views on standard royalty rates. Depending on the genre, fiction vs nonfiction, the publisher, and numerous other variables will affect the going royalty rates.

        I do see your point that this post is meant to show earning out vs success. My concern was mainly that new authors see a number (like a royalty rate) and when their experience doesn’t match up with that perceived “reality,” then they get very disappointed. I’ve worked with and for various nonfiction and fiction publishers, and have yet to see a debut author without a platform getting such a good rate, even with an good agent.

        But I guess that’s the trick with trying to show numbers in a general sense without getting into millions of specifics.

  12. Steve Laube June 13, 2011 at 12:47 pm #

    Michelle,

    It also depends on whether you are seeing a royalty rate of 14% as a percentage of net or a percentage of retail (cover price).

    I was using a percentage of net (what the publisher receives) not a percentage of the cover price.

    • Michelle June 13, 2011 at 12:54 pm #

      Good point.

      I’ll stop taking the discussion off on tangents now. :)

      • Steve Laube June 13, 2011 at 12:57 pm #

        It’s not a tangent in my opinion. It is critical that readers understand the difference between a net-based royalty and a retail-based royalty.

        I’ve seen a number of contracts that have a paperback royalty of 7.5% of retail (cover price).

        But the majority of contracts we negotiate have a royalty based on the net price. In my opinion, 14% of net royalty is on the low end of a good contract. And there is no discernible difference between fiction or non-fiction on these numbers.

  13. Dave Gardner June 13, 2011 at 7:12 pm #

    Excellent elaboration on the hidden side of publishing! Thank you for making this so much easier to understand. I just read the book “Maybe You Should Write a Book” written by Ralph Daigh (former publisher of Fawcett books) and published in 1977 that explains much of this same thing. Your explanation brought more recent figures to the table. I’m going to be sharing this link with a bunch of my writer buddies!

    • Steve Laube June 13, 2011 at 8:57 pm #

      It would be interesting to read a book written about the industry from 30 years ago. Most interesting would be to see what has not changed!

  14. Natasha Kern June 13, 2011 at 7:24 pm #

    Steve, this is an excellent breakdown and I’m glad you blogged about this. And I agree that 14% is on the low end of net royalties for a trade paper book (and without escalators). I think you should take on reserves against returns next and how income is generated by investing that float! :-) I think few writers understand why books are sold returnable especially in the general market when other products are not. Bravo for presenting this!!!

    • Steve Laube June 13, 2011 at 8:58 pm #

      Natasha, excellent idea. Are you daring me?
      I’ll put it on the list of potential posts!

  15. Sally Apokedak June 13, 2011 at 8:30 pm #

    Thanks for writing this. I always thought authors got 10% escalating to 12% or 12.5% of retail–I think these are the figures agents at the general market conferences usually use–so 16% of net did not seem high to me.

    But I’m wondering if you will do a post on expectations.

    Why does a publisher who makes a profit stop publishing an author because he didn’t meet expectations? I have never understood why a guy who makes his publisher a thousand dollar profit might get another contract and a guy who makes twenty times as much might not get another contract. Or am I wrong about that?

    I think John Green touched on this, but I’d love a little more on it. And speaking of John Green, how did you get him to comment on your blog? I guess agents really are rock stars. :) But is he right that many books get six-figure advances and four-figure sales? Ouch. Do these failed expectations ruin your career? And how can authors know what to expect from their books and can they do anything to keep publishers from having expectations that are too high?

    • Steve Laube June 13, 2011 at 9:03 pm #

      Sally,
      The royalty you quote (10%, 12.5%) is for hardcover sales. Paperback sales receive a 7.5% of retail royalty.

      That is the single major difference between a contract from Berkley vs. a contract from Tyndale. The NY houses generally (not all the time) base royalties on retail and use the escalation only on hardcovers. The CBA (Christian market) tends to base contracts on the net price.

      I know of one case where the CBA house was able to win the deal because they could offer better paperback royalties than the NY house. And with many books debuting in trade paper it will become more of a discussion to have.

      I’ll take your suggestion for a future post seriously and will try to lend my two cents.

  16. Sharon A Lavy June 14, 2011 at 5:00 am #

    I’m glad I was able to read the discussion. I understand better now. The royalty can be based on net or gross and that of course is a different figure. We really do need agents. Thank you and your crew for staying the course when others are getting burnt out.

  17. Ane Mulligan June 14, 2011 at 6:54 am #

    It absolutely makes sense. Thanks for posting this Steve. It’s good to know going in. :)

  18. Martha Rogers June 14, 2011 at 8:47 am #

    At last, I can understand my royalty statements. Math is NOT my strong suit.I was thrilled to get the % I did for my first series. Thanks for the enlightening information. My next royalty will have my first book for an advance, and now I’ll understand the numbers. Wow, who knew there was so much more than just writing the manuscript. :)

  19. PatriciaW June 14, 2011 at 9:03 am #

    In 10 years of learning about the publishing industry, definitely the best post I’ve seen on advances and the economics of publishing. Easy to follow and understand, and illuminates what “profitable” begins to mean from a publisher’s vantage point. Thanks.

  20. Clay Morgan June 14, 2011 at 9:09 am #

    Great post and discussion. Thanks for breaking this down Steve. I am borderline hopeless in some math, but these numbers make perfect sense. More importantly, I get the point. Thanks!

  21. Sally Apokedak June 14, 2011 at 10:06 am #

    Thanks! I see the difference now between paperback/hardback and Christian and general market publishers. I look forward to hearing what you have to say about expectations.

  22. Joseph Bentz June 14, 2011 at 11:29 am #

    Thanks for this very helpful post. I like how you put into perspective the idea that the advance is simply one of a number of fixed costs for the publisher (but one that gets more attention than printing, administrative costs, etc.). It’s easy for people to overlook how relatively small the advance is compared to all those other costs.

  23. Robin Patchen June 14, 2011 at 4:50 pm #

    Excellent post. As a writer, I see all the work that goes into writing a book on the front end, but the publisher is assuming an enormous amount of risk, especially with an unknown. It’s great to see the costs lined up like that. In the end, if the publisher doesn’t make money, he doesn’t stay in business. And where does that leave the writer? It’s in everyone’s best interest to understand the costs involved.

  24. Sherry Jones June 14, 2011 at 10:18 pm #

    My agent Natasha Kern suggested your blog to all her clients and I’m glad she did. You explained the economics of book publishing so well; you’d make a great schoolteacher. I am curious, though, about the $10,000 for marketing the first book versus $75,000 for p.r. and marketing for the second — the exact amount listed as the advance for each book. Should I expect my publisher to spend $20,000 for marketing and p.r. for my next book, since that was the advance I got?

    • Steve Laube June 15, 2011 at 11:36 am #

      The models I presented are not REAL. They are generic estimates to show costs and profitability with regard to advances.

      The advance is not tied to the marketing budget. One agent told me that they have a situation where the advance was over $200k and the marketing budget was closer to $75k. The publisher was evidently using the name recognition of the author as a way to market the book without having to spend as much money.
      But that is the exception.

      Generally an advance is based on what the publisher think the author will earn in the first year of the book’s sales. So if paid $20k the publisher thinks you’ll earn that much.

      Also, a general rule of thumb is that the publisher will spend $1 for every copy they think will sell in the first year. So if they project first year sales of 20,000, the marketing and PR budget will be $20,000.

      But don’t take this as gospel or tell your agent that “Steve Laube said I should have THIS size of a budget.”!!!

      The problem is that all marketing budgets are not equal either. A $20,000 marketing budget may not be actual “cash” the publisher spends on the book. It may have a sizeable portion allocated as co-op advertising expense with a major chain.

      Please. Do not see the above post or this comment as a Rule or a stated Fact.

      Each book has its own customized cost and revenue structure.
      The print costs may be different depending on the type of paper stock chosen, the time of the year, paper shortages in South America where the printer bought their last supply, whether or not the cover has gold foil stamping on it or not.

      Get the picture?

      Steve

  25. Mia Marlowe June 15, 2011 at 3:22 am #

    Thanks for explaining this labyrinth in a way those of us who think in words instead of numbers can understand. Now if you’ll please tackle the logic of “reserves against returns…”

  26. Barbara June 15, 2011 at 12:00 pm #

    Sorry, but I don’t see that this shows that not earning out is good for the publisher. It shows that the publisher pays the author more if the royalty rate is higher. To prove what you’re trying to prove, you’d need to have two examples that used the same royalty rate but different numbers of books sold.

    And BTW, as an a former auditor, I’ve never seen an instance where administrative costs are a flat percentage of gross income, ie that administrative costs rise in step as the number of units sold increases. In fact, selling more units is a way of making a profit after you’ve covered administrative costs. So you wouldn’t be able to use 20% of net as administrative costs and have a realistic example.

    Soooo….I’m sorry, I’m not at all convinced.

  27. Steve Laube June 15, 2011 at 1:44 pm #

    Barbara,
    I never said that “not earning out is good for the publisher.” The point I’m trying to make is that if a book doesn’t earn out, it doesn’t necessarily equal “FAIL.”

    The financial models I put out there are not necessarily real. They are controlled statistics to illustrate that a book with the same advance and same unit sales doesn’t equate failure of success BASED ON THE ADVANCE. Instead it is the revenue, as you pointed out. It is the earnings subtracted by the expenses.

    And if the total advance paid is presented as a line item expense the model changes. Most models I’ve seen separate the earned royalty as a line item expense and leave the total advance paid as a ubiquitous number outside the profit/loss statement.

    As for admin costs? I’ll have to respectfully disagree. Every Profit/Loss projection sheet I’ve ever seen has admin as a percentage of revenue for the profitability model.

    And when they do “cost accounting” per book at a publishing house they apply standardized cost numbers to the revenue of each book. I argued this point when I was an editorial director. I said you should not charge a flat editorial rate on every book. But they simply took the total editorial costs in a season and divided it by the number of books we produced and charged them all the same.

    However you are right. When auditing a company’s books, the admin charge would be an actual figure, not a projected one. Thus what you saw as an auditor would be different because an audit is of real numbers “as a whole” not projected profit/loss by unit.

    If I had used a smaller or a variable number in “Admin costs” any publisher reading the blog would have laughed at the model as unrealistic.

  28. Deeanne Gist June 16, 2011 at 9:11 am #

    Excellent post, Steve. I’ll be forwarding the link to many. Hope all is well!

  29. Cheryl Elaine Williams June 17, 2011 at 10:49 am #

    Most informative! Thanks, Steve, for posting.

  30. Laura Hilton August 25, 2011 at 4:26 pm #

    Thanks! I was just asking Tamela about this very thing, because my “royalties” for the first three months the book was out was $800 below what the publisher paid her and me thus far. She told me not to worry and referred me here. Okay, my brain is melted from all the numbers, but its a little clearer. Thanks!

  31. Bonnie Leon October 17, 2011 at 4:01 pm #

    Excellent post, Steve. And I’ve enjoyed reading the exchange that followed. Your scenario of the unearned advance has stirred up a lot of attention. Not surprised.

    Grace and peace to you.

  32. Cathy Clamp March 22, 2012 at 6:48 am #

    Very nice explanation, Steve. And, one of the best things about the ebook explosion is that revenues for the publisher increase without as much outgo. There’s the formatting, of course, and possibly the cost of a publisher purchase portal development, but overall, ebooks are really helping midlist authors survive and publishers keep paying decent advances.

    Thanks for the great post!

  33. Note February 8, 2013 at 9:44 pm #

    Try doing some calculations for a book that has earned 30% or 50% of its advance instead of the 91% ($9,100/$10,000)you pick. 91% has practically earned its advance.

  34. Carol E Wyer February 10, 2013 at 1:59 am #

    A super post that explains the mystery of the advance very well. I think I’d happily deal for several bags of wine gums though. That’d make life easier.

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