PolEcon of OA Publishing VI: Economies of Scale
I think I committed to one of these every two weeks didn’t I? So already behind? Some of what I intended in this section already got covered in What are the assets of a journal? and the other piece Critiquing the Standard Analytics Paper so this is headed in a slightly different direction from originally planned.
There are two things you frequently hear in criticism of scholarly publishers. One is “why can’t they do X? It’s trivial. Service Y does this for free and much better!”. I covered some of the reasons that this is less true than you might think in What’s the technical problem with reforming scholarly publishing? In particular I argued that it is often the scale of systems and the complexities of their interconnection that mean that things that appear simple (and often are for a one off case) are much more complex in context.
In turn this argument, that big systems become more rigid and require greater investment in management and maintenance, raises the other oft-heard comment, that the industry is “ripe for disruption” by new nimble players. There is growing criticism that Christenson’s narrative of industrial disruption isn’t very general (see for e.g. articles in New Yorker, Sloan Business Review[paywall]), but for the purposes of this piece lets assume that it is a good model; that large industrial players tend towards a state of maintenance and incremental improvement where they are vulnerable to smaller, more innovative players who have less to lose, less investment in existing systems, and customers, and can therefore implement the radical change. This kind of narrative is definitely appealing, even empowering, to those agitating for change. It is also picked up and applied by analysts who take a more traditional approach.
So why hasn’t it happened?
The news pieces heralding the imminent demise of Elsevier started in the mid-90s. And people in the know will admit that internally there was a real fear that the business would be in big trouble. But despite this the big players remain remarkably stable. Indeed consolidation in the industry has increased that stability with a rapidly decreasing number of independent companies publishing a substantial proportion of the world’s research literature. The merger of Springer and Nature is just the latest in a long run of mergers and purchases.
A conventional market watcher will say that such mergers indicate that there are economies of scale that can be harnessed to deliver better returns. Cynics often point out that what is really happening is a recapitalisation that benefits a small number of people but doesn’t generate overall returns. Certainly in scholarly publishing there are serious questions about combining very different cultures creates benefits. It is not an accident that mergers and purchases are often followed by a mass exodus of staff. In the case of the Springer-Nature merger the departure of many senior ex-Nature staff is a clear indication of which of the two cultures is dominating the transition.
If we take Christenson seriously then a lack of disruption, and simultaneous consolidation implies that there are real economies of scale to be achieved. What are they? And are they enough to continue providing a sufficient barrier to entry that disruption won’t happen in the future?
Possibly the biggest economy of scale is the most obvious. Simply having access to resources. Elsevier’s public reports show that it has access to substantial amounts of cash (albeit as a credit facility). The 2015 RELX Annual Report [pdf] (p57) notes that “Development costs of £242m (2014: £203m) were capitalised within internally developed intangible assets, most notably investment in new products and related infrastructure in the Legal and Scientific, Technical & Medical businesses” giving a sense of the scale of investment. It is these resources that allow large corporations invest large amounts of money in various internal projects and also to buy up external developments, whether to add to the technology stack, bring in new expertise or to remove potential competitors for the market. Sufficient cash provides a lot of flexibility and opportunity for experimentation.
It’s not just the big players. PLOS is probably best characterised as a “medium sized” publisher but benefits from having access to capital built up during the period 2010-13 where it had significant surpluses. In the 2015 Annual Update PLOS reported $3.7M (8% of $46.5M total expenses) on R&D in FY 2014 and with a new platform launching imminently this probably saw a large uptick in FY 2015. eLife has not reported 2015 figures but again substantial development has gone into a recently launched platform, supported by access to capital. Smaller publishers, and particularly new market entrants don’t generally have access to the kind of capital that enables this scale of technology development. Community development is starting to make inroads into this and Open Source community projects are the most likely to challenge existing capital concentration but it is slow progress.
Broad Business Intelligence Base
Scholarly publishing is both slow and tribal. Publishers with a broad based set of journals have a substantial business intelligence advantage in understanding how publication behaviour and markets are changing. They also have privileged access to large numbers of authors, editors, and readers. They don’t always use this information well – the number of poorly constructed and misinterpreted surveys is appalling – and indeed sometimes still get tunnel vision based on the information they have, but nonetheless this is an incredible asset.
At best a disruptive market entrant will have deep insight into a specific community, and may be well placed to better serve that specific niche. The tradeoff is that they frequently struggle to scale beyond that base. This is in fact generally true of technology interventions in scholarly communications. What developers think is general often does not work outside of the proof of concept community. A variant of this is showing that something works, using the literature in Pubmed Central or Europe Pubmed Central as a demonstrator and failing to understand how the lack of infrastructure outside that narrow disciplinary space makes generalisation incredibly difficult.
Seeing a broad landscape and being able to see future trends developing is a powerful advantage of the big players. Used well it can drive the big strategic shifts (Springer’s big bet on APC funded Open Access, Elsevier’s massive shift in investment away from content and publishing into integrating Scopus/SciVal and Mendeley for information management). Used less effectively it can lead to stasis and confusion. But this information is an enormous strategic asset and one that smaller players struggle to compete with. Disruption in this context has to wait for the unforced error.
Diversified financial risks
Having the scale to develop a range of revenue sources is a huge benefit. Springer have a strong books business, Elsevier a significant revenue source in information. They are also diversified across disciplinary areas, some growing, some shrinking, and at generally have more coverage of varied geographies. New players like PeerJ, eLife, or Open Library of Humanities tend to have at best a few revenue sources, and often a restricted disciplinary focus. A lack of revenue diversity is certainly a risk factor for any growing business. On the other side most advice to start-ups to focus on developing one single revenue source, the transition from that start-up mode to diversification is often the challenge.
The other form of scale comes from having a sufficiently diverse and large journal portfolio to make up a big deal. It can be difficult for a small publisher to even get libraries to give them time when the amounts of money are relatively small. Effort is concentrated on the big negotiations. Having a stable of journals that includes “must-have” subscription titles along side volume (whether in mast heads or article numbers) that can be used to justify the annual price increases has been a solid strategy. The arguments for market failure for subscriptions are well rehearsed.
Ironically the serials crisis is leading to a new market emerging, a market in big deals themselves. With libraries increasingly asking the question of “which big deal do we cancel” the question of which of the big four is offering the worst deal becomes important. The deals being sought also differ. In North America it is usually Wiley or Springer deals being cancelled. The Elsevier big deal for subscription content generally appears to be better value for money in that context. In Europe, where the deal being sought includes provision of large scale Open Access publishing in some form it is the Elsevier big deal that more frequently looks at risk of being dropped. This kind of competition over big deals isn’t yet happening at a large scale but it does pose some risk of the economies of scale gained by a diverse journal list becoming a liability if large sets of (low volume and low prestige) titles become less attractive.
If we look at new and emerging entrants to the market that have succeeded we can see that in many cases their success lies in having a way around some of these economies of scale. Capital injection, directly through grants (PLOS, eLife, OLH) or from investors (Ubiquity, PeerJ) is common. Building on existing Open Source technology stacks (Ubiquity, Co-Action) and or applying deep technical knowledge to reduce start-up costs (PeerJ, Pensoft) is a strategy for avoiding this.
Successful startups have often created a new market in some form (PLOS ONE being the classic example) or build on deep experience of a specific segment (PeerJ, CoAction) or a new insight into how finances could work (Ubiquity, OLH). Many big players are poor at fully exploiting the business intelligence they have at their disposal. For whatever reason scholarly publishing is not a strongly data-led business in the way that term is usually used in the technology industry. Missed opportunities remains one of routes to success for the new smaller players.
Looking across the crop of existing and emerging new players revenue diversifications remains a serious weakness. And this limits the scale of any disruption they might lead. In this sense it could be argued that there are not yet any mature businesses amongst them. Ubiquity Press is probably the best example of a new publisher developing diversified revenue streams. Ubiquity’s offerings include an in-house OA publishing business with a a low enough cost-base to provide a range of funding models including APCs, endowments and community supported arrangements. It also provides services to a growing number of University Presses as well as underpinning the operations of OLH.
Real disruption of the big players will need a combination of financial stability, very low cost base, and technical systems that can truly scale. All of these need to come together at the same time as an ability to either co-opt or appropriate the existing markers of prestige. Christenson’s disruption narrative presumes that there is a parallel space or new market that can be created that is separate from existing assumptions about “quality” in the disrupted market. But when “quality” is really “prestige”, that is in a luxury goods market, this is much harder to achieve. The financial and business capacity to disrupt is not enough when quality, prestige and price are all coupled together in ways that don’t necessarily make any rational economic or business sense. That’s the piece I’ll move onto tackling next.