[Editor’s note: This is the edited text of a presentation that Joe Esposito gave as a keynote at the PSP conference in Washington, D.C. on Feb. 3, 2016. The slides for the presentation are embedded at the end of the text. Joe would like to thank John Tagler and Sara Pinto of PSP for their assistance in arranging this presentation and his partner, David Lamb, for help in developing it.]
I want to talk today about three hypothetical organizations. The first of these is a for-profit, $100 million professional publisher with operating income of 20%.
I know I have immediately gotten the attention of the business development people in the room. They are wondering: Are there any $100 million companies left? And if there are, how can we buy them? Let’s repeat: these are hypothetical organizations. The reason I did not choose a larger size–say, $500 million or a billion or more–is that we all know who those companies are and I don’t want to make specific references to any of them.
The second organization is a not-for-profit professional society with a successful publishing program. Publishing revenues are about $25 million a year. Operating income is 20%. The program’s surplus (as a not-for-profit, it calls its profit a “surplus”) goes to support other activities of the society, such as managing a conference each year, recruiting and assisting young scientists, and outreach, which may include some government lobbying.
The third organization is a start-up. As a matter of convenience we will say that this is a “pure” start-up and not a new effort within an established company. This organization has some venture funding, a small dedicated staff, and little revenue. Of course, it has big ambitions; and if it didn’t, the investors would change the management.
The question I have for these three organizations is how their strategies differ. They are all operating in the same environment; they all read the same stories in the trade publications. When they craft a strategy, do they all come out in the same place, or do their very different sets of assets lead them to come up with different plans to move forward?
My argument is that all of their strategies come under the headings of bulwarks, agility, and foresight, but the organizations don’t all play the game the same way. I would add to this that it is a very big mistake to attempt to run an established company like a start-up.
When I think about the publishing environment, I whimsically imagine a scene out of some medieval fantasy — Lord of the Rings or Game of Thrones or any of a number of movies set in in a time long ago and far away. The scene is of a town or castle under siege. The drawbridge has been pulled up from the moat — and there is always a moat — and archers man the barricades. Meanwhile, siege equipment is brought up to scale the walls; battering rams pound the gates; and the attackers plot to take advantage of a secret passage or a spy within the walls. Among publishers the feeling of an industry under siege is a common one. Whenever I talk to publishers I am always struck by how beleaguered they are. Although sometimes they talk about their competitors, mostly they talk about things independent of strict marketplace competition.
The list of weaponry for this industry under siege is a long one. To name but a few, we have the open access movement, whether it comes in its Gold or Green variety. We have a certain growing militancy among library groups, which view publishers as their enemy. We have the relentless assault on copyright, whether it comes from the political Left or simply as a straightforward assertion of the business interests of tech companies. We have the public relations headache surrounding pricing, especially in the textbook market, and a media landscape that views publishers the same way they look at the tobacco industry. As these challenges have developed, they have gotten the attention of funding agencies and national governments, which view publishers as operating outside the public interest. It is no wonder that publishers feel under siege. The question is how to manage the situation. Or, to extend the metaphor, at what point do we lower the bridge and ride out to take the field once again?
With reference to our three hypothetical organizations, we can see that they are unlikely to all behave in the same way. The large commercial organization will probably review its assets and seek to protect them. After all, this company is making $20 million a year on the bottom line and no one, not ever, walks away from free cash flow. So our commercial publisher begins to create a plan that has at its heart the goal of continuing to make at least $20 million a year and to take steps to avoid any downward sliding. To do this the publisher will come up with a number of bulwarks to protect its assets. This could include the acquisition of more assets of a similar kind in order to strengthen a market position, it might include a “hearts and minds” marketing campaign to win over participants and observers and especially policy-makers in the publishing ecosystem, and it may include the extreme and unreliable bulwark of litigation, which can be viewed as an attempt to enforce a set of rules that not everybody subscribes to. A specific example of a clever bulwark strategy is CHORUS, which was put together by some of the people here today. Among other things CHORUS serves to contain the spread of multiple instances of scholarly articles and the de facto creation of a single open repository that could in time supplant publishers’ own offerings. Established publishers are not likely to stop here, but the bulwark strategy generally rises to the top of the list in practice if not in corporate philosophy.
Our society publisher sees things a bit differently. For one thing, the matter of size is of great importance, as even the most distinguished society publishers may be struggling to maintain the attention of its customers. Another issue is the decision-making process, which among not-for-profits is often byzantine and always slow-moving. This publisher also has a responsibility, which is captured in its tax-free status, to operate with its mission before it at all times. This is commendable, but it also introduces a special set of administrative overhead, which cramps some competitive instincts.
What is interesting about our society publisher is that although it sees the world differently from the commercial publisher, it is likely to embark on the same strategy. Knowing that its surplus goes to fund important society activities, it strives mightily to protect its cash flow. So it erects a set of bulwarks. Like the commercial publisher, it begins a “hearts and minds” marketing campaign, which likely boasts of the society’s not-for-profit status. In rare cases it will use the bulwark of litigation or the threat of litigation, but it is hampered in its attempt to shore up its defenses because it lacks the resources of the larger commercial entity. For example, it finds it hard to engage in defensive acquisitions because it simply can’t afford to or its governance structure is unaccustomed to dealing with transactions, and it may struggle to broaden its customer base because of the cost of maintaining a global footprint.
For all the differences between a for-profit and a not-for-profit publisher, it’s usually the case that the not-for-profit publisher that adopts the same strategy as its larger rival does so with less success. This is because regardless of your tax status, everyone operates in the same marketplace. This is why so many society publishers opt for the bulwark of capitulation. They do this by aligning themselves through service agreements with their larger rivals. It is indeed a useful bulwark strategy, though it is less rewarding than to be the company at the top of the heap.
When we turn to our hypothetical start-up, however, we see a vastly different approach. The start-up also sees the medieval castle, the crenellations, archers, and the siege equipment, but the start-up does not imagine that it is inside the walls of the city; it imagines it is outside trying to break in or to reduce the castle to rubble. While many start-ups talk about this in the loftiest and even utopian terms, a better explanation is that laying siege to a castle is what you do when you don’t have any assets of your own. A start-up has no or few assets to protect. It may have only a handful of customers; it may control no intellectual property. What it does have is a notion of where things are headed and the confidence that they see this first. It should come as no surprise to established publishers that start-ups typically embrace many of the principles and practices espoused by the library community, funding agencies, and open access advocates. For a start-up these voices represent their natural constituency and a costless alliance.
Start-ups almost always have to embrace agility. We should spend a minute on what we mean by that. The word “agile” has a great deal of currency nowadays, in large part because of its use in the tech world. Agile development is a specific kind of software-development process, which involves the collaboration of self-organizing teams. Its real impact on publishing, though, is as a metaphor where it has come to mean — surprise! — agile, that is, the ability to react quickly to changing circumstances. For a start-up being agile could be a matter of existential importance. A backer might pull out, leaving the company with no cash to continue operations; or a big customer may look elsewhere; or even the very length of the sales cycle can put excruciating pressure on the balance sheet. The problem a start-up has is that it has no assets to rely on, nothing to keep the lights on while the broader strategy is being executed.
On the face of it you would think that being agile is a good thing, and it is. But it’s important to note that agility is only useful or necessary when you are caught by surprise. Sometimes that surprise is a bad thing, as when a customer defects, and sometimes it is positive, as when a sudden opportunity presents itself. The point, though, is that whatever the situation, agility is inversely related to foresight. If you have a good command of the vital issues of your industry and your company, you rarely have to invoke agility as a strategy.
Of course, the reason we invoke agility nowadays is because there is a popular perception that start-ups are eating everybody’s lunch. Well, they are and they aren’t. It’s certainly true that established companies, whether for-profit or not-for-profit, are often behind on the innovation curve. The best example of this is Gold open access (OA), which is proving to be a very nice piece of business and which the larger companies are now beginning to incorporate into their operations. But Gold OA was created by a start-up and subsequently developed into a meaningful activity by another start-up, the latter one operating in the not-for-profit sector. You have to ask, why didn’t Wiley or the American Chemical Society get to Gold OA first? And why did we have to wait for PLOS to make this model mainstream? The fact is that the success established companies have had with Gold OA has been reactive.
On the other hand, many start-ups seem to have little room to grow. I am skeptical about ResearchGate and Academia.edu, to name just two examples, as their business models seem to me to be too highly dependent on successful legal outcomes. It doesn’t matter how quickly you respond if you don’t have a way to make money. Burning through venture capital can only take you so far.
Strategy, in other words, is a hand-crafted thing. It varies by the type of organization, the size of the organization, the field the organization publishes in, the interests and needs of its shareholders and stakeholders, and where the organization is in its life cycle. There is no such thing as an industry strategy; there is no big picture for the industry overall.
So a bulwark strategy is of little use to a start-up, but how valuable is it to our hypothetical commercial and society organizations? We may as well admit that no one is going to be able to talk an established company out of a bulwark strategy; the only question is what form that strategy takes. The real issue with creating bulwarks is that it absorbs energy from the more difficult task, which has fewer immediate results, of foresight. When a company files a lawsuit, senior executive have to put time into managing the effort. That’s time taken away from long-range planning. Too often the R&D expenditures of a company are but a fraction of what is spent on legal affairs. This is backward. While a bulwark to protect the existing business is necessary, a company also must invest in its future. Otherwise the start-ups will get to have all the fun.
So let’s review how these three organizations play this game.
The start-up cannot focus on protecting an existing business because it has none. It is likely to make a case for possessing great insight into where the industry is going, and sometimes start-ups do indeed have that vision. In my experience, though, start-ups usually succeed by being tactical. They find opportunities and jump on them. Later they may claim that they knew where they were heading all along, but I have worked with a lot of start-ups and almost always their success seems to rest on their ability to pounce on new opportunities. For a start-up agility is everything.
Our society publisher is in a tough position. While there are some large and extremely successful society publishers, as a group the playing field is tilted against them. This is because the marketplace has evolved in such a way as to benefit the largest commercial participants. A society publisher will try to erect some bulwarks, but it lacks the resources to play this game as hard as it would like. It is likely to be ill-equipped to adopt an agile strategy, as its decision-making process is cumbersome. As an aside, this seems to me to be the inherent problem with many of the new library publishers that are coming on stream now: they may not be able to react quickly enough to new events as they arise. The society publisher is going to have to place a very big bet on foresight — that is, anticipating how the marketplace will evolve and to take advantage of those changes before anyone else — or it may find itself having to take a subordinate position in the value chain. We will get into how to develop foresight in a minute.
As for the large commercial publisher, putting aside the option of simply selling out to a larger rival, which is the ordinary course of events, it will naturally put up as many bulwarks as it can. It might preach a gospel of speed and agility, but we all know that it is not true. It has to bet, and bet big, on foresight. The danger is that it will be so absorbed in protecting its existing business that it won’t put sufficient time and attention into building a new one.
The problem with foresight is that you can’t predict the future. But what we can do is narrow down some of the options and we can keep an eye on activities on the perimeter of the core business. For example, I have heard people say that all scholarly journals will be flipped to open access in five years. That was five years ago. Does anybody believe that academic libraries will not have a budget for purchasing materials five years from now? Foresight tells us that libraries will still be a factor in the journals business in the foreseeable future. The harder question is how large that role will be and what new channels can be developed.
Developing Business Foresight
Seek multiple inputs
For coming up with a vision of where things are headed, I am an advocate of broad and distributed inputs. These insights can come from authors, board members, librarians, outsiders — anyone who will talk to you. Poll these people on an ongoing basis. Also, don’t overlook your own staff. In my experience there is always someone inside every organization who has grasped an important aspect of where the marketplace is headed, but these perspicacious visionaries may sit far down in the organization. Think, for example, of the young people working at the music companies in the years leading up to Napster. Some of them were file-sharing before Napster. I know this from direct experience, as I was running an Internet community company at the time and we saw significant file-sharing on our network two years before Napster launched. Somebody you already employ knows the answer. The trick is to find out who.
Place lots of small bets
It makes sense to place a great number of small bets on future programs. This is because we really don’t know which one will work until it catches fire. On the other hand, letting these experiments overstay their welcome is a costly mistake. When a program is not doing what it was supposed to, be ruthless and shut it down. Then move on to the next experiment.
Study other segments of the publishing industry for new ideas
One of the best ways to get intelligence on the future of your business is to look at what is happening in other areas of publishing. Here scholarly publishers had something to teach trade publishers, but the management of the trade houses weren’t interested. I am thinking of the special variety of Gold open access introduced as PLOS ONE. Trade publishers were dismissive of self-publishing, but for almost a decade now we have seen clear signs of its viability in scholarly publishing. Today self-publishing is the fastest growing segment of the entire industry.
Put your best people on the new activities
Foresight without strong operations leads nowhere. For the new programs you undertake, put your very best people on them. This is the opposite of what most companies do now. The strongest people are asked to tend to the established business; this means they spend their time in raising bulwarks instead of thinking creatively about the future. Once again let’s emphasize that bulwarks are a good and necessary thing for an established business, but surely you should be putting more resources into tomorrow’s business than yesterday’s.
Be on the lookout for entrants from left field
The hardest thing is to anticipate a new player from outside the industry. When this happens, it has the potential to shake up the entire ecosystem. Think of what Google has meant to the A&I business, for example. Google did not enter this space for the reasons that other publishers would. It’s necessary to understand the strategic imperatives of some players outside your own industry. Obviously, you can’t stay on top of everyone, but it’s good to track the names of the companies that send people to trade shows and those that only recently became customers. It may also be useful to open up a conversation with them early in the game.
What’s on My Own Screen Right Now?
I wish my crystal ball or my telescope or my radar screen was better than it is, but I will mention a couple things that have caught my attention.
For my part the area I am watching most closely is data science and text and data mining. At this time we don’t know what the analysis of large databases of published materials will lead to, but if someone identifies emergent properties from these databases, and if those properties open up the possibility of high-value monetization, everything could change. If the data-mining activity yields new value, we could see companies like Hewlett Packard, Palantir, and IBM buying up publishing companies. That would make all our heads spin. But if it happens, I want to have given some thought to its implications beforehand.
I am keeping my eye on scholarly and professional publishers that are developing a network of linked or associated properties. The network model enables a publisher to lead users from one property or node on the network to another, collecting additional information at every step. We may find that these networks will marginalize publishers that don’t have an established network of their own.
The Internet enables the collection of a great deal of end-user data. In some respects this allows professional publishers to adopt some of the strategies of consumer media companies. What will it mean to develop a huge database of end-user data? Does it have leverage beyond the sale of advertising?
I am waiting to see a new generation of apps for mobile devices that serve as a control panel for a particular content domain. The opportunity for the organization that develops such an app is to control all of the activity even of competitors’ services. If you are the company without the app, you may find that all your users are mediated by a hostile third party.
Finally, I have been persuaded that the institutional ebook market is likely to experience significant disruption in the coming years. The programs at ProQuest and EBSCO don’t deliver what scholars need, with few exceptions publishers operating in this market are struggling to make money, and Amazon to date has not been able to leverage its strength in print into a robust institutional ebook market. Look for new players to challenge the incumbents.
Let’s stop here for questions.