Elsevier has had a target on its back for years when it comes to OA, so it’s not surprising in this environment that a financial analyst is now warning that OA trends could prove “catastrophic” for Reed-Elsevier, lowering their profits by 60%:
Elsevier journal revenues would be under significant threat because the article processing charges it would earn for many of its publications are unlikely to prove anywhere near what the company needs to be revenue neutral. . . . We think the risk posed to the Elsevier business model is substantial. We believe investors are underestimating the disruption that both the EC and even the UK policies could pose to the business model of Elsevier . . .
Despite what this analyst says, there are many reasons to believe otherwise, and not just for Elsevier but for most, if not all, major commercial publishers:
- The math. Here’s some arithmetic, for those of you who still believe in it — if Elsevier is generating profit margins of 33% from its journals business (not clear this is so, but that’s the conventional wisdom), this impact, if as dramatic as this analyst believes it might be, could lower the margins on Elsevier’s journals business as it is currently conducted to 14%. This is still a good business, albeit not a darling of the stock exchange (except maybe nowadays). It seems worth noting that, in a bit of irony, the stock market power of Elsevier or any other company usually helps provide money for next-round investments in new businesses or entities. In this instance, PaidContent, the site reporting on this analyst’s claim, is part of GigaOm, which is partially funded by Elsevier Ventures. Good journalism, but what happens when there’s less money in Elsevier’s pockets? Math has a way of being merciless.
- The market. This is the opinion of one analyst, one who is not necessarily reading the tea leaves correctly. There is a lot of misinformation about OA and what it means for scholarly publishing, and it still remains in a definite minority position as a business model, even with mandates on its side. After all, there are mandates for deposit of manuscripts at the NIH, and a very low compliance rate even though it is free to do so. It’s easy to imagine that the compliance rate when a researcher has to pay to publish might be even lower — and funding for the mandates and for any compliance monitoring are key unsolved issues. A petition that garnered just over 12,000 signatories to protest Elsevier is easily given too much credence, while a larger number of paying customers and satisfied scientists are glossed over because they are the status quo.
- Adaptation is well underway. Elsevier has made some quiet moves to enter the OA space, including launching 25 OA journals, and publishing 1,200 journals with hybrid arrangements in which authors can opt to pay to make their articles OA. Other commercial and large not-for-profit publishers have been adapting for a while, including Wiley, Springer, Nature, SAGE, OUP, PLoS, and more. Price points vary widely, as do ownership arrangements, editorial approaches, and profitability. OA is not one thing. It’s a modified toll gate arrangement, with the toll gate moving from in front of the content to being flipped around so that it’s in front of the publisher’s release point. What the toll gate charges, and what services are withheld prior to payment, can and do vary. Toll gates exist in either OA or subscription publishing, however, so why an expert in one toll gate wouldn’t be able to execute another just as expertly isn’t clear. What is clear is that Elsevier is entering the OA space, and, if history is any guide, they will not be trying to go broke doing so.
- The gravitational effects of quality. There are real concerns emerging about the quality and reliability of the underlying literature, as producing, protecting, and filtering it becomes less profitable and synthesis, data, and intelligence services become more profitable. This shift of revenues will cause editors, publishers, and customers to shift their focus from the publication of primary research to development of secondary services. But the bottom line for any data, synthesis, or intelligence service is “garbage in, garbage out.” Right now, these services can perch on top of a literature that isn’t flawless, but that is generally quite reliable. What happens if the literature becomes less filtered, if quality standards are lowered as they are in some mega-journals, if publishers cater to authors more than to readers, and if conflicts of interest aren’t weeded out as reliably? What price are we willing to pay for fundamental quality?
- The lack of a price ceiling. The growth in OA mega-journals might be attributed to the pricing of the services (i.e., low), but in fact, the growth may be due to the ease of publication, which is the truly valuable part of these outlets for researchers. If this is the case, then the price point may be artificially low, and could move up significantly without upsetting the community. That is, if the market for rapid, one-stop publication is less price-sensitive than OA publishers currently believe, rapid and easy OA publication could become quite expensive and quite lucrative. There is no law of nature keeping these prices low.
- Evidence of OA’s profitability. OA publishing can be quite profitable. Aside from last year’s 22% profit margin and this year’s 18% profit margin for PLoS, more and more publishers are whispering about how this or that OA journal or journals family is surprisingly profitable, with margins that in some cases are standouts in larger companies. Commercial publishers aren’t going to miss these facts, and some of these journals I’ve heard about are already with commercial publishers. Springer didn’t acquire BioMed Central to lose money, and Wolters-Kluwer isn’t starting down the OA path with vigor in order to avoid profits. The analyst quoted in the PaidContent story may be exactly wrong — OA initiatives may make commercial publishers even more profitable.
Commercial publishers have adapted to new revenue streams before, and some quite recently. When society and association memberships were in their heyday during the 1940s through the 1980s, commercial publishers were there to become intertwined with these lucrative revenue streams. When print advertising was strong in certain fields, commercial publishers learned the business. When online sales became the norm in the late 1990s, commercial publishers were quick to learn not only how to sell these, but how to bundle them into the Big Deals we’re all familiar with. And when the market for primary literature down-shifted, secondary services and data initiatives started popping up as commercial publishers adapted to this shift.
Never underestimate the power of scale combined with the motivation of having something to lose.
This also should serve as a sober warning to those who believe non-publishers can easily become publishers thanks to the Internet or other tangential magic. It’s not as easy as it might seem, and even if you can do it, success will foster competition, which can be extremely difficult to fend off if the competitor has advantages you can’t match. And even if you can compete in the current environment, subsequent adaptation to market evolution is expensive.
In short, there’s little reason to believe that OA initiatives will be “catastrophic” for commercial publishers. These publishers have the staff, contracts, contacts, infrastructure, experience, archives, and technologies that can help them turn the corner into an OA world with more than a bit of “Tokyo drift” flair, if that’s where the market goes. Many are actively turning the corner now. This particular analyst’s concern may be misplaced. Looking at the market and the history of consolidation for the sake of market efficiency, I’d be more concerned if I weren’t a commercial publisher in the OA space. After all, OA is made for scalable efficiency, and commercial publishers have that in spades.