The Scholarly Kitchen has some of the smartest readers around. That’s not self-congratulatory — you read us, so you must be very smart. It seems to be a fact. Well-educated, well-informed, thoughtful, and insightful comments come in every day, and outnumber posts by 12:1. Often, social media notes things like, “The comments are especially useful.” And comments often lead to new ideas for posts. This time, the path is quite direct.
A number of recent comments streaming out of a post about disagreements in the UK about the role of Gold open access (OA) contributed some interesting quantitative assessments, and generated a lot of discussion outside the blog or the comments. This is encouraging, because these are discussions we need to have, as I recently argued in a lengthy post. Highlighting these is a way of further fostering conversation.
In case you missed these data-rich comments, here they are again. The data we accept and the meaning we attach to it are important to how we think about the past, present, and future. I have added one update.
Speculation About PeerJ
Comment by Mike Taylor:
I have just this moment seen this tweet: speaking at the ALPSP conference, Jason Hoyt of PeerJ has said that they spend $600 per month (i.e. $20 per day) on IT services. That’s astonishingly cheap, given the huge scalability and redundancy they’ve built in.
Comment by Thomas Hilock:
Sadly PeerJ doesn’t pass the sniff test. Not even close.
$600 per month on IT services, wow, that’s great. What a headline. That’ll get a retweet from @miketaylor.
Now let’s talk about Alf Eaton, Patrick McAndrew, Jackie Thai, Dave Harrington, and Janos Toth. Who are they you ask? That’s the operations team that runs the PeerJ. How much do you think they cost a month? Let’s average it at an extremely modest $80k each pa, that’s 400k per year, before you house them in one of PeerJ’s two offices, that need to be rented, lit, supplied, managed. And let’s not talk about benefits, or bonuses, or take into account marketing, or the CEO’s salary, or HR, travel expenses, taxes…
Now, let’s talk about incomes. Peer J so far this year has published 157 articles. Let’s average it at 7 authors each, and they all adopt the highest plan of $299. That’s $330k. All they’ll ever get out of these authors. And they can publish as much as they want. BUT they could have bought the cheapest plan, so revenues could be as low as $110k.
Now I’m not a mathematician, but I can tell you this, if I was their accountant, I would be telling Peter to go look for some more venture capital pretty quick.
(Update: PeerJ recently signed deals with UC Berkeley and the University of Cambridge, which will redirect library funds to cover costs for publishing with PeerJ.)
What Is a Profit Margin?
Comment by Mike Taylor:
“The report regularly calls out the excessive profit margins of publishers, yet mentions only one such publisher, Elsevier, who due to its size likely represents an edge case.”
As most readers will be aware, this is not true. Elsevier’s profit margin — 37.3% for 2011 — is right in the middle of those for the Big Four publishers. Springer took 33.9% in 2010, WIley too 42% and the academic division of Informa too 32.4%. Details here. For comparison, Apple’s best ever reported profit margin was 24%. Exxon makes 6.5%.
Comment from me:
A margin of 6.5% for Exxon is US$16 billion in profits. Elsevier is a $3.3 billion company overall — journals, databases, books, legal, etc, etc. At 1/5 the profit margin, Exxon makes 5x the size of Elsevier in its entirety in profit. Given the common 5x valuation for publications as an assumption, Exxon could buy Elsevier with one year’s profit. These comparisons aren’t informative.
The problem with the BIS report is that it tries to extrapolate from an edge case (Elsevier) to an industry in which 81% of the companies make less than $25 million in revenues per year. Clearly, the vast majority of the market consists of small publishers, most of which are society or academic in nature.
Companies like Elsevier and Wiley comprise 0.4% of the STM market. Using them as examples is clearly misleading.
Comment from steelgraham:
“Companies like Elsevier and Wiley comprise 0.4% of the STM market”. Was that a typo ??
Comment from me:
No, that is true. They have 19% of the revenues, but are only 0.4% of the companies. 81% of the companies make $25 million or less in revenues (i.e., they are very small).
Comment from Mike Taylor:
“Companies like Elsevier and Wiley comprise 0.4% of the STM market.”
I don’t understand how this can be so. Elsevier’s annual revenue is on the order of £2 billion, in a market which the STM report estimates as being worth about £8 billion in total. Even if only half of Elsevier’s revenue is from journals (which seems likely to be a significant underestimate), its £1 billion in journal revenue surely constitutes 12.5% of the market on its own.
Comment from me:
They are 0.4% of the companies, they hold 19% of the revenues.
If you’re looking for representative companies, you can’t look at them as your sole or even primary or even secondary sources.
Comment from David Wojick:
I think if you look further you will find a lot of corporate level expenses that are not allocated to the operating divisions, especially payments to bondholders, which is debt coverage. I once heard it said that after debt service Elsevier’s profit was more like 3% but have never checked this out. Likewise the operating divisions may not pay for the buildings they operate in, but the corporation does. The people who actually deal with these accounting issues are trying to say that they are not simple, but those who use the big numbers as a political club prefer to ignore them. It is an old trick.
Comment from Mark Danderson:
In 2011 Elsevier’s net profit (after interest, and tax) was £767mn on sales of £6.002bn giving a total corporate profit margin of 12.8%
In 2010 the same figures were £648mn, £6.055bn and 10.7%
But the really important number in business is not profit on sales but return on capital. The return on capital for Elsevier in 2011 was 34.9%.
David, since academic institutions are the sole market for journals and books does it matter which of the two is more profitable? The more important point is that the profit margin from the academic market segment is 37.3%.
I disagree that these numbers are not readily available. The big publicly traded publishers publish their results because it is required by law. The same is true of societies (at least in the US). If you dig hard enough, you can find the numbers you need.
David, you asked about the Univeristy of California Press; here are their numbers according to their annual report:
Books Sales $17.322mn; Operating Profit (before overhead) $9.11mn; Operating margin 52.6%
Journals Sales $5.401mn; Operating Profit (before overhead) $2.257mn; Operating margin 41.7%
Overhead expenses $15.375mn
Operating Loss -$2.805mn
UC System $2,611mn
UC Press Foundation $888k
TOTAL NET PROFIT $694k (including subsidies) Net Profit Margin 4%
They do not provide balance sheet information so it is impossible to calculate their return on capital.
Comment from Mark Danderson:
PLOS is a not-for-profit entity, so they use different accounting rules than those used by publicly traded companies such as Elsevier. So it is a bit harder to compare financial results (but not impossible).
According to PLoS financial reports here are their results for 2011:
Total revenues $22.276mn (roughly 95% of this comes from publication fees).
Their publication costs were $13.922mn meaning that their equivalent of operating profit is $8.354mn or 37.5% (almost exactly the same as Elsevier).
Their G&A expenses are $4.4mn, leaving them with a surplus (since they are not-for-profit, it cannot be called profit) of $3.954mn or 17.8% – a bit better than Elsevier.
As a not-for-profit, they do not have contributed capital but PLoS had total net assets (assets minus liabilities) of $8.72 at the end of 2011. Therefore their rate of return on net assets (which can be roughly compared to contributed capital in a publicly traded company) was 45.3% (which is considerably better than Elsevier).
You are right David, you cannot extrapolate the results from one company to an entire industry. As my brief and incomplete analysis shows, some companies perform better than others.
There are high-profile firms in our industry, and they are too often used as representatives of the entire industry, which is diverse and composed mainly of small publishers that make less than $25 million each year in revenues (PLOS may still be one of these, but probably matriculated from this group in 2012). The generally small scale of most scientific publishers has created major challenges for them in a digital age that rewards scale with economic benefits. It currently ensures diversity and deep involvement from scholars, as most companies are integral to their communities. Moving away from this diverse and integrated arrangement should be done with care.
As one comment noted, arriving at a “profit margin” is fraught because the term can refer to a number of related but differently encumbered measurements. There is margin on sales, gross margin, net margin, return on equity, return on assets, and so forth. Gross margins tend to be the most misleading, because they measure a subset of an organization’s expenditures against revenues — often, corporate expenses like legal, human resources, and other administrative expenses come later.
Another commentator argued there is nothing immoral about a certain profit margin. I tend to agree, as the role of any enterprise is to maximize its value while minimizing its costs. The difference between the two is profit. Companies that deliver a lot of value at relatively low costs can teach us things, yet are usually anomalies. But the very idea of a “margin” can also mislead. Comparing Elsevier’s margins to Exxon’s was particularly enlightening here, as a higher margin from Elsevier still amounts to a pittance compared to Exxon’s lower-margin business. Or Apple’s. Or Google’s. Size also plays a role. Scale matters. PLOS has a potentially higher-margin business than Elsevier, and Hindawi definitely has a higher-margin business. Those businesses are comparatively small. Are those margins immoral? Are larger companies immoral because they make more cash at a lower margin?
Keep those comments coming. Sweeping statements and isolated cases don’t help us figure out the overall trend or direction of the industry. Reading these comments, and others like them, is perhaps the most interesting facet of this blog, and where a lot of the conversations we need to have are occurring.