Claudio Aspesi — an analyst based at the sell-side research firm Sanford Bernstein — predicts a difficult future for Reed Elsevier, particularly for its scholarly journal business. He also predicts the demise of the Big Deal, the business model in which scholarly publishers sell access to multiple journals by means of a single electronic subscription.
In a report published last year Aspesi warned that a combination of the global financial crisis and the rise of the Open Access (OA) movement would impact negatively on the revenues of scholarly publishers. Yet, he said, Reed Elsevier appeared to be "in denial on the magnitude of the issue potentially affecting scientific publishing".
A year later Aspesi appears even more gloomy. In his most recent report he has downgraded Reed Elsevier to “underperform”, and warns that the widely-used “Big Deal” arrangement, is becoming “unsustainable in the current funding environment.”
While the Big Deal may have worked well as a solution for over a decade, he says, we can expect to see research libraries start cancelling their contracts — a development that will “lead to revenue and earnings decline”.
Speaking to me last week Aspesi repeated his belief that Reed Elsevier is in denial. “[I]f management has a Plan B, they have certainly kept it under wraps, and everything they have said supports my current view that they are in denial”, he told me.
Of course Reed Elsevier is not the only publisher threatened by the current climate, and clinging in desperation to the Big Deal. When I spoke to the CEO of Springer Derk Haank last year, for instance, he told me that it was “in the interests of everyone — publishers and librarians — to keep the Big Deal going.”
Unlike Elsevier, however, Springer embraced OA seven years ago.
Cleary these are difficult times. And the nub of the matter is money: With the number of research papers produced annually constantly rising publishers expect to increase their prices each year to reflect that rise. And the Big Deal, they believe, is the best way of ensuring they can do this, while providing research institutions with access to the greatest number of journals.
Librarians, however, are adamant that prices must fall. To that end library organisations like Research Libraries UK (RLUK) — which represents the libraries of Russell Group universities — have begun organising public campaigns designed to pressure big publishers to end up-front payments, to allow them to pay in sterling, and to reduce their subscription fees by 15%.
The RLUK campaign is being led by Deborah Shorley, the director of Imperial College London Library. “[T]he fact is”, she said recently, “we don’t have money in the sector and we can’t afford to go on spending as we have.”
Meanwhile OA is both a threat and an opportunity for scholarly publishers, and Reed Elsevier should have embraced it by now, says Aspesi.
OA advocates want to see all papers arising from publicly-funded research made freely available on the Web. Green OA, or self-archiving, would see researchers doing this themselves, and so pose a significant threat to publishers’ revenues.
For that reason, suggests Aspesi, Elsevier should have pre-emptively experimented with Gold OA — or OA publishing — as Springer did. By levying a fee for publishing papers, rather than a subscription to read them, publishers can hope to reduce costs, and perhaps maintain their current profit levels as a result.
But there are no certainties in scholarly publishing today. And while many in the research community also believe that OA publishing offers the best long-term solution, it is far from evident that it will resolve the affordability problem. It could also lead to a decline in the quality of published research.
Either way, prices look set to fall over time. This would inevitably mean a decline in the revenues of scholarly publishers.
In short, both scholarly publishers and the research community are caught between a rock and a hard place. For researchers, suggests Aspesi, it may mean having to accept that they will be able to publish fewer papers in the future.
Aspesi explains why in the email interview below, conducted at the end of last week.
Claudio Aspesi
RP: Bloomberg reported in February that Elsevier’s most recent profits are up more than 60%, to $1.03bn. In a report published last week, however, you downgraded Elsevier to “underperform”. Why?
CA: There are several reasons, but it ultimately boils down to two. The stock market is a powerful discounting mechanism for future events: a company can be performing very well but have a share price that overvalues the future (or perform very badly but have a share price that undervalues the future).
In the case of Reed Elsevier, I believe that market expectations about the future of Elsevier are too optimistic. In addition, I have concerns about the future performance of other parts of the portfolio (like their US legal business) that also lead me to think the stock is overvalued.
RP: In your report you say that the days of The Big Deal are coming to an end. The death of the Big Deal has been long predicted. Why do you think we have finally reached the “crunch point” as you call it?
CA: I think there are three trends overlapping: a long term unsustainable trend, a cyclical funding crisis and a more tough minded and analytical community of librarians.
Revenues for STM publishers have been rising faster than library budgets for many years, and librarians have had to cope with this discrepancy by cutting back their spending in other areas.
We can all speculate whether this could have continued indefinitely or not, but it does not really matter: the financial crisis has led to widespread cuts in library budgets, forcing research libraries to take a harder look at what they spend on serials.
Overlay to the funding crisis the realisation that Big Deals forced librarians to take journals that nobody (or almost nobody) really accessed and you set up a perfect storm.
RP: The consensus is that Elsevier will see 4% growth in 2013. You predict only 2%, possibly lower. Is that correct?
CA: Yes. Please bear in mind that Elsevier also sells books and databases and electronic retrieval services, and I expect these businesses to prove more resilient over time. It is the Big Deal itself that looks increasingly under pressure.
The funding issue
RP: When I spoke to Springer CEO Derk Haank at the end of last year he described The Big Deal as the “best thing since sliced bread”. He added: “The truth is that it is in the interests of everyone — publishers and librarians — to keep the Big Deal going.” What is he not seeing that you see?
CA: The funding issue. Of course — from a publisher’s perspective — to be able to gain some revenues, any revenues, from journals which were not really read is terrific. We have seen the usage data of some universities and found that as many as two thirds of the titles in some Big Deals were accessed once a month or less.
I suspect that many librarians, if they run the numbers, will find that one third or less of the titles they acquire through Big Deals really matter to their user community.
But it was nice for librarians to be able to offer “everything” to their users. They did not consider that the Big Deals were depriving libraries of the funding needed for other activities.
Professor Darnton of Harvard University published in December 2010 an article in the New York Review of Books (The Library: Three Jeremiads) which captures perfectly the impact of publishers revenue growth on academic libraries and on the academic press.
RP: Haank pointed out to me that the number of research papers is growing at 6% to 7% per year. “Librarians need to accept that if they want access to a continually growing database, then costs will need to go up a little bit,” he said. “We try to accommodate our customers, but at a certain point, we will hit a wall.”
This seems to be the nub of the problem: Publishers are processing more and more papers each year, and so they expect to raise their prices. But the research community insists that it cannot afford to pay any more. Nevertheless, Haank assumes that eventually more money will be found. As he put it, “[O]ver time, I expect people will realise that scientists have to have sufficient funding to keep abreast of new developments.”
You, however, believe that publishers will simply have to accept that their revenues are going to fall, because there really is no more money?
CA: I have no doubt that — over time — adjustments would be made. But it remains to be seen if they need all the 2,200/2,400 journals that the each of the largest publishers maintain today.
You know, my job is not to pass judgement on how people run their business or to decry capitalism, only to advise investors whether they should buy or sell stocks.
I can observe, however, that there is something unhealthy about an industry which has managed to alienate its customers to the point their membership associations increasingly focus time and attention on how to overturn the industry structure. It is not a good thing to have your customers spend their time trying to put you out of business.
No Plan B?
RP: In a report you published last June you said that Elsevier was in denial about the situation. In this report you argue that even though the company was aware of the current problem as early as 2005, it ignored it. Is that correct? Why do you think they have no Plan B — as you put it?
CA: I dug out a presentation that Reed Elsevier organised for investors back in 2005 on Elsevier. At the bottom of a slide titled “Attractive Growth Markets”, and dedicated to show how global university and R&D funding were growing between 5 and 8% a year, was the sentence “Although library budgets have not kept pace: 1-3%”. If they thought they needed to address this issue, it did not show in the following years.
To be fair, the financial community also ignored that line. In my recent report, I quoted one of my own reports from December 2007 in which I wrote “Elsevier has still enjoyed a healthy underlying growth rate of 5%...We expect these levels of revenue growth to be sustained going forward”. I am just as guilty of ignoring it as everyone else.
RP: If you too were wrong in 2007 it is presumably possible that your assumptions are wrong today?
CA: Of course. I wish I could always be right.
But if management has a Plan B, they have certainly kept it under wraps, and everything they have said supports my current view that they are in denial. My report opens by quoting David Prosser, the Executive Director of Research Libraries UK, who told the Wall Street Journal back in November 2010 “We do not wish to cancel big deals, but we shall have no alternative unless the largest publishers substantially reduce their prices”.
Somehow, this issue has to be addressed; Elsevier may be in a better position than me to answer why they are not.
RP: I wonder if Elsevier might be stuck on the horns of a dilemma: They have to keep delivering profits for their shareholders, and this may be restricting their ability to do the right thing for their long-term future.
CA: Again, I think it would be interesting to know what the top management of Elsevier thinks is the right thing for their long term future. More of the same? Hope that funding returns to libraries by the end of 2011 so that the storm blows over? Go back to the 1-3% libraries funding growth that was already putting publisher revenue increases on a collision course with library budgets?
In Haank’s own words “We will hit a wall”. Does Elsevier think that walls stand only on the path of other publishers?
Open Access
RP: In September last year Elsevier launched its first Gold OA journal, The International Journal of Surgery Case Reports. Was that a good move on their part? Should they be doing more of that?
CA: Excellent companies experiment and try new concepts all the time.
RP: Does Open Access publishing offer a solution to the current difficulties confronting scholarly publishers? Some argue, for instance, that OA could provide them with the same revenues as they currently get from the Big Deal. Moreover, since some/much of the costs would be met by research funders, rather than libraries, new money would flow into the system?
CA: I have asked myself that question several times. Publishers talk about tapping the larger revenue streams that come from the funding of science, and Open Access would seem a logical way to do that.
I think what holds them back is the fear that the transition will be long and messy, with many researchers unable to secure the funding to pay for publication fees. Moreover, some journals with very high impact factors probably reject so many submissions that the publication fees would have to be absurdly high.
RP: In your earlier report you said that the real threat comes from self-archiving. Has that threat grown or eased in the last year would you say?
CA: It is remarkable how slowly the world of academic publishing changes from year to year. Just to show examples from a business we are all familiar with, at least to some extent, 12 months ago the iPad did not exist, Nokia was a well-liked mobile handset manufacturer, and so on; a year later, everyone talks about tablets and apps and Android.
Somehow, the academic community moves at a glacial pace. It is no wonder that investors decided that Open Access will never happen: they are used to seeing most activities and businesses change constantly.
RP: Can I push you on whether you see self-archiving as a greater or lesser threat than a year ago. Essentially we are talking about the growth of self-archiving mandates.
CA: Even on mandates we have seen little progress. There have been several new mandates from both public and private institutions, but there is such a patchwork of mandates (and little transparency on the compliance) that I doubt there is a single research library that has changed its buying patterns to reflect the new or the cumulated mandates.
An aggressive US Federal Government mandate could change that, both because it would affect a significant amount of research and because the rest of the world would likely feel pressured to follow suit. Even so, if the embargo of copyrighted material was long enough, the impact would be negligible.
RP: What are the implications of the current situation for the research community?
CA: If the Big Deal goes away altogether, fewer journals will be sustainable, which means that less research will be published. This headline sounds threatening for the research community, until you ask yourself how much of the research which is being published today is actually read. My guess is that if fewer subscription journals are published, something else will take their place, probably a combination of Open Access journals and self-archiving repositories.
If, on the other hand, only a meaningful portion of the Big Deals are discontinued, the publishers will be faced with the dilemma of whether to cull marginal journals or not, since they support their pricing for the portion of the market which would still buy Big Deals. My guess is that truly marginal titles would be discontinued, but it would be difficult to cut most.
RP: As you say, most articles are not read, and so librarians are currently paying for products that their patrons don’t use. One could perhaps argue that in an OA environment this would not matter since the customer becomes the author, not the reader, and authors have to publish to get promotion and tenure. As such, reading is not as important as publishing, and given the publish-or-perish pressures they are under one might assume that researchers would inevitably find the money to publish, even if it meant taking it from their own pockets. If correct, this suggests that publishers could preserve their revenues by embracing Gold OA?
CA: I am always puzzled by the hostility of the leading publishers towards Open Access. As you point out, there is no reason why revenues, over time, could not be roughly equal for the two models. I suspect the hostility derives from the need to operate in a period of transition that is difficult to manage. The fog of change can be daunting.
RP: Some in the research community warn of the danger of a catastrophic collapse of the scholarly communication system. Might they have a point?
CA: Yes and no. It is clear that if 15 to 30% of the academic publishing industry revenues were to evaporate over a three to five year period, the industry would have to slim down substantially.
Lower revenues would lead to fewer articles being published, and probably lower profits. Lower profits and dimmer prospects for profit growth may in turn lead to less investment in innovation as investors would demand that less capital is allocated to an industry with less future profit growth. Does this mean that there would be no innovation? Not necessarily.
Again, I suspect that other models could emerge to fill the space: Open Access journals, repositories, and perhaps some we cannot even imagine today.
A bubble
RP: So how would you characterise the current situation with regard to scholarly journal publishing?
CA: I will use an analogy that may be imperfect, but which contains some lessons. For a very long time, the music industry sold to consumers more music than consumers really wanted. It did so by forcing consumers to buy albums even when they may have just wanted one or two songs; in fact, it killed the single because it was not profitable enough, in spite of the fact it had always been very popular with consumers because it was cheap and it contained the music they wanted.
Then consumers figured out they could rip music from CDs, put it on a hard drive, and burn it on a blank CD. If their friends did not have the tracks they wanted, they could even go to peer to peer sites and get all the music they wanted, and — even better — it was free.
Physical piracy and peer to peer distribution of music did lead to the catastrophic collapse of the music industry in many countries because the revenue base shrank to the point that it became impossible to sign up artists and produce albums. But the music industry is still in existence, albeit on a much smaller scale, and an endless stream of innovators is trying to find ways to revive it with all kinds of new consumer propositions.
Perhaps there is too much research being published today, and the value of the long tail of research is probably modest. This industry benefitted — just like many others — from a bubble, and that bubble has now burst. But the basic demand for dissemination and retrieval of important scientific and medical research is still there, and I am confident it will continue to be fulfilled.
RP: Do you still think that Reed Elsevier should go for a “progressive divestiture”, as you suggested last year?
CA: It all depends on the value of the sum of its parts at any given time. Last time we calculated it, back in January, we decided there was a 15/20% upside to the share price — meaningful but not staggering. I can think of companies in my coverage where the upside would be as much as 50 to 60%. In any case, Reed Elsevier management seems to show no inclination to pursue this path.
RP: Thank you for your time.
Claudio Aspesi’s latest report can be accessed here.
