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A tale of two analysts

15 February 2012 10 Comments

Understanding how a process looks from outside our own echo chamber can be useful. It helps to calibrate and sanity check our own responses. It adds an external perspective and at its best can save us from our own overly fixed ideas. In the case of the ongoing Elsevier Boycott we even have a perspective that comes from two opposed directions. The two analyst/brokerage firms Bernstein and Exane Paribas have recently published reports on their view of how recent events should effect the view of those investing in Reed Elsevier. In the weeks following the start of the boycott Elsevier’s stock price dropped – was this an indication of a serious structural problems in the business revealed by the boycott (the Bernstein view) or just a short term over reaction that provides an opportunity for a quick profit (the Exane view)?

Claudio Aspesi from Bernstein has been negative on Elsevier stock for sometime [see Stephen Curry’s post for links and the most recent report], citing the structural problem that the company is stuck in a cycle of publishing more, losing subscriptions, charging more, and managing to squeeze out a little more profit for shareholders in each cycle. Aspesi has been stating for some time that this simply can’t go on. He also makes the link between the boycott and a potentially increased willingness of libraries to drop subscriptions or abandon big deals altogether. He is particularly scathing about the response to the boycott arguing that Elsevier is continuing to estrange the researcher community and that this must ultimately be disastrous. In particular the report focuses on the claims management have made of their ability to shift the cost base away from libraries and onto researchers based on “excellent relations with researchers”.

The Exane view on the other hand is that this is a storm in a teacup [summary at John Baez’s G+]. They point to the relatively small number of researchers signing up to the boycott, particularly in the context of the much larger numbers involved in similar pledges in 2001 and 2007. In doing this I feel they are missing the point – that the environment of those boycotts was entirely different both in terms of disciplines and targeting but an objective observer might well view me as biased.

I do however find this report complacent on details – claiming as it does that the “low take-up of this petition is a sign of the scientific community’s improving perception of Elsevier”, an indication of a lack of real data on researcher sentiment. They appear to have bought the Elsevier line on “excellent relations” uncritically – and what I see on the ground is barely suppressed fury that is increasingly boiling over. It also focuses on OA as a threat – not an opportunity – for Elsevier, a view which would certainly lead me to discount their long term views on the company’s stock price. Their judgement for me is brought even further into question by the following:

“In our DCF terminal value, we capture the Open Access risk by assuming the pricing models flip to Gold Open Access with average revenue per article of USD3,000. Even on that assumption, we find value in the shares.”

Pricing the risk at this level is risible. The notion that Elsevier could flip to an author pays model by charging $US3000 an article is absurd. The poor take up of the current Elsevier options and the massive growth of PLoS ONE and clones at half this price sets a clear price point, and one that is likely a high water mark for journal APCs. If there is value in the shares at $3000 then I can’t help but feel there won’t be very much at a likely end point price well below $1000.

However both reports appear to me to fail to recognize one very important aspect of the situation – its volatility. As I understand it these firms make their names by being right when they take positions away from the consensus. Thus they have a tendency to report their views as certainties. In this case I think the situation could swing either way very suddenly. As the Bernstein report notes, the defection of editorial staff from Elsevier journals is the most significant risk. A single board defection from a middle to high ranking journal – or a signal from a major society journal that they will not renew an Elsevier contract – could very easily start a landslide that ends Elsevier’s dominance as the largest research publisher. Equally, nothing much could happen which would certainly likely lead to a short term rally in stock prices. But no-one is in a position to guess how this is going to play out.

In the long term I side with Aspesi – I see nothing in the overall tenor of Elsevier’s position statements that suggests to me that they really understand either the research community, the environment, or how it is changing. Their pricing model for hybrid options seems almost designed to fail. As mandates strengthen it appears the company is likely to continue to fight them rather than adapt. But to accept my analysis you need to be believe my view that the subscription business model is no longer fit for purpose.

What this shows, more than anything else, is that the place where the battle for change will ultimately be fought out is in stock market. While Elsevier continues to tell its shareholders that it can deliver continuing profit growth from scholarly publishing with a subscription business model – it will be trapped into defending that business model against all threats. The Research Works Act is a part of that fight – as will be attempts to block simple and global mandates by funders on researchers in other places. While the shareholders believe that the status quo can continue the senior management of the company is trapped by a legacy mindset. Until shareholders accept that the company needs to take a short-term haircut the real investment required for change seems unlikely. And I don’t meant a few million here or there. I mean a full year’s profits ploughed back into the company over a few years to allow for root and branch change.

The irony seems that large-scale change requires that the investors get spooked. For that to happen something has to go very publicly wrong. The uproar over the support of SOPA and RWA is not, yet, enough to convince the analysts beyond Aspesi that something is seriously wrong. It is an interesting question what would be. My sense is that nothing big enough will come along soon enough and that those structural issues will gradually come into play leading to a long term decline. It may be that we are very near “Peak Elsevier”. Your mileage, of course, may vary.

In case it is not obvious I am not competent to offer financial or investment advice and no-one should view the proceeding as any form of such. 

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  • Bill Hooker said:

    “Peak Elsevier”, he he, very good.  I agree with everything you say but I would go one step further.  Having now worked outside of academia for a while I think that the sorts of “root and branch” changes you outline as (and that I agree are) necessary are virtually impossible to achieve in a publicly traded company.  There is no incentive for management to make that kind of long-term investment — all incentives lead instead to shoring up the crumbling edifice until it collapses and then getting out from under with as much loot as you can carry.  I’ll make my own prediction: rather than move towards OA and accept that profits will decrease, Elsevier will escalate the conflict.  Expect to see moves that make RWA and PRISM look like friendly sparring.  The mindset is “we’ll hang on to 40% margins month-by-month until they are pried from our grasp, then we’ll abandon the whole thing and make paper profits on the basis of ‘efficiency measures’ or some such bullshit; by the time the dust settles we’ll be long gone with our golden handshakes”.  Elsevier will be a predatory subscription-model publisher right up until it gets out of the publishing business entirely.

  • Bjoern Brembs said:

    Also agree in principle with the necessity (and likely impossibility) of “root and branch changes”. One caveat, though: going gold OA with an average of 3k isn’t too unlikely, given that Elsevier has about 2000 journals which could wary from 30 to 30k, easily. If people pay 20k for a semester at Ivy League, surely they’d pay 30k for a tenure-granting Cell paper…

  • Cameron Neylon said:

    Bill, then the smart answer is to take a longer term short position on Elsevier. From a personal view this is becoming very tempting. Problem is I don’t know enough about how one really goes about such things.

  • Cameron Neylon said:

    Yes, but the case you’ve been making, successfully in my view, that only a half-wit administrator would give that much credence to the JIF of a Cell paper in a tenure decision will start to play through as well. I’m sure there will be enough such half-wit administrators around for a while – but my suspicion is that competition for a) people who are actually doing good work and b) people who are competent to recognise people who are doing good work without resorting to the fortune tellers flogging useless numbers like the JIF will rise to a point that the value of the Cell paper will be pretty marginal by comparison.
    The administrator that isn’t prepared to take responsibility for making the most important investment decision they will ever be involved with, whether to appoint a specific person, and tries to pass that decision off to some third party, isn’t competent to hold their post in my view.

  • Bill Hooker said:

    I don’t own shares of anything because the stock market is an ethical race to the bottom.  But if it would damage Elsevier I might be convinced to go in on a crowdsourced buy.  We could agree upfront to spend any profits on countering anti-Open FUD.  I don’t know how the terms and interest are arranged but I certainly expect their stock price to plummet within a few years.

  • Bjoern Brembs said:

     Of course I can’t disagree with you on any of the above :-)
    It just sounds a bot too good to be true :-) On the other hand, if I didn’t believe there’s a chance in hell that it’ll happen that way, I wouldn’t be involved.

  • Jeff miller said:

    Interesting seeing the analysis from the two professionsals. However, you appear to have a bias against Elsevier. It’s unfortunate that you could not have taken a more objective stance. Although, I do give you credit for posting both viewpoints.

  • Cameron Neylon said:

    To be honest I can’t see much value in taking an “objective” stance if that means just reporting two different views. The views of the two reports are laid out – and you can obviously read them if you want to (I am hoping I will be able to make the Exane one public – I do have a copy but am not sure whether I can distribute it). I want to add something more and I have an opinion. This is, after all, an opinion piece. If having an opinion makes me biased then so be it. Like I say people are free to disagree but I’d live to have some substantive arguments about why people disagree, rather than just an accusation of bias. I can’t stand the “she said-he said” style of most supposedly balanced journalism today.

  • Pawel Szczesny said:

    Elsevier has many card PLoS does not have such as sheer size or an activity in developing countries (textbooks for free, etc.). Lots of leverage points to use. At 7M articles in the archives and at 250k published a year they probably think of themselves as “too big to fall”. 

    I see two scenarios: Elsevier becomes nationalized/turned into non-profit (given the number of structural problems in almost any area of human activity [lots of things that simply can’t go on], huge social tense and upcoming military conflicts, things can turn quite dramatically) or nothing major happens (I tend to consider this slightly more probable) and after dust settles down Elsevier becomes a major OA publisher at $3k per article “free to read” and subscription model for text-mining access. 

    I don’t think stock market has any role in the process. Gambling on the stock market is no different than betting on a horse (there are legal differences, but these are not that important in these days). So-called “investors” are expendable (check MF Global story if you have any doubts ;) ). 

  • We may be closer to ‘Peak Elsevier’, but investors and the stock market need to be spooked by bad publicity before the company’s practices change. | Impact of Social Sciences said:

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