When a financial analyst uses the term “catastrophic” in regard to the impact of open access on publishing giant Reed Elsevier, it is bound to attract some attention. In a September 10, 2012 report from the firm Sanford Bernstein, senior analyst Claudio Aspesi did just that, and the reaction has been predictable. “Catastrophe” has been in every headline (including mine!), from those that seem a little gleeful at the idea of bad things happening to the publishing company so many academics love to hate, to those that wish to defend the conglomerate.
Thanks to the kind permission of Mr. Aspesi, the complete report can be accessed here.
It is worth noting how the word is actually used in Aspesi’s report. In assessing the overall prospects for Reed Elsevier, Aspesi notes that they are very dependent on the high profit margins at Elsevier, the academic publishing arm, so that a reduction in those profits might be “catastrophic” for the parent company. He then goes on to explain why open access, specifically gold open access with the anticipated shift from subscription-based revenues to article processing fees (APCs), seems to threaten that high profit margin. In the past, Aspesi has recommended that Reed Elsevier should spin off other parts of its company to reduce its exposure; a call that the company has rejected.
The bottom line for investors in the Berstein report is that the company rates Reed Elsevier to “underperform,” and pegs the target stock price at $6.45. As this comparison report shows, other analysts put the target stock price somewhat higher.
To me the most interesting part of the report is its discussion of where article processing fees for gold open access journals are likely to go.
The fundamental conclusion in Aspesi’s report is that for Elsevier to maintain its current revenue through a complete transition from subscriptions to APCs — for that transition to be “revenue neutral” for Elsevier — the APCs charged to each author for publishing in an Elsevier journal would have to increase about 70%, from current levels (for open access) at about $3000 per article to about $5,145 per article. Aspesi does not think the market would bear this increase, and in that I think he is surely correct.
This discussion of APCs is fascinating, and there are several nuances we can add to it. First, Aspesi notes that an option for Elsevier to maintain revenue in the OA transition without raising APCs this high would be to publish more articles. The move to online certainly makes this possible, but the option has significant drawbacks, especially for a firm that depend heavily on its “brand” (as do university tenure and promotion committees). Another possibility would be to recognize that not all journals are equal and charge differential APCs, based on the desirability of publishing in that particular title. This raises the possibility that scholars would begin to shop around for journals with lower APCs for those articles that are not accepted into the top-tier journals. We have not had much competition in the area of scholarly publishing in the past, but as different publishers charge different APCs, and those fees might even, perhaps, vary within one publisher’s titles, this possibility of competition, where cost and reputation are balanced together in the decision about where to publish, could grow.
In explanation of his conclusion that even with higher APCs it would be difficult for Elsevier to maintain its high revenues, Aspesi cites a simple fact — in the OA world, journal bundling would no longer be possible. At present, Elsevier and others are able to sell lower-readership journals as part of “big deals” and at no additional cost to the company. The OA world, however, imagines that each journal would have to stand on its own bottom, with revenue dependent on how desirable publication in that particular title is. Aspesi’s discussion of what OA “big deals” might look like — various models for offering universities better pricing or “all you can eat” agreements for open access publishing — is fascinating but concludes that it would be very difficult to reach such deals and that they would not solve the problem of needing to increase APCs to cover costs.
One additional problem with increasing APCs for Elsevier journals, which returns to the issue of competition among journals, is the likelihood of downward pressure on APCs just as the transition would seem to force established traditional publishers to raise them. The growth of OA megajournals like PLoS One, which already charges a much lower APC for articles it publishes than Elsevier does for its “sponsored articles,” may create such downward pressure. So might some of the new models for open access, like eLife, which is supported by research funders and will not charge APCs, or PeerJ, which is building a membership model for OA.
The key to this analysis, and the problems it poses for Elsevier — whether catastrophic or not — is the cost per article. Aspesi bases all of his projections on the assumption that it costs about $3,200 for Elsevier to publish each article, or, more significantly, $1200 per article submitted (850,000 submitted articles versus 316,000 published). Many fully OA journals do not have such high costs, which is the reason they can charge lower APCs. Aspesi acknowledges that Elsevier may be an expensive organization to run (not run on a “shoestring,” he says), but does not explore how or if those costs per article could be reduced. Yet it seems to me that that is the key for survival for traditional publishers if they are to weather the transition to open access.
We can experiment with as many different pricing and funding models as we like, and I hope there are a lot, but we fundamentally need to have a conversation about how much it costs to publish a single scholarly article. Those costs have been hidden in the byzantine structure of subscription prices and bundling, especially from the larger publishers. That model has allow great opacity about actual costs, and for years universities have accepted that situation, which has now become clearly unsustainable. But as we make the transition to open access, and gold OA plays a large part in the new paradigm, it will be harder and harder to avoid being open and honest about how much scholarly publishing really costs, and how some groups seem to be able to do it for so much less.