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Summary:

Government plans to make publicly-funded research available for free online will be great for citizens but terrible news for journal publishers. One could lose up to 60 percent of its profits, an analyst warns.

Moves to make publicly-funded research available for free online could be disastrous for academic publisher Reed Elsevier and its shareholders, investors have been warned.

In July, three UK education research councils and the European Commission announced stipulations that future research partly funded by taxpayers – much of which is currently published through subscription journals – must be made more open-access. The UK government has labelled research “paywalls” “deeply unhealthy”, and wants to free up availability.

Berstein Research‘s Claudio Aspesi writes in a research note:

“It could drive the profitability of the journal business of Elsevier down by as much as 60%

“Elsevier journal revenues would be under significant threat because the article processing charges it would earn for many of its publications are unlikely to prove anywhere near what the company needs to be revenue neutral…

“We think the risk posed to the Elsevier business model is substantial. We believe investors are underestimating the disruption that both the EC and even the UK policies could pose to the business model of Elsevier…

“A collapse of the profitability of Elsevier would be catastrophic for Reed Elsevier.”

Reed Elsevier’s share price has gone on rising through the recent announcements due to healthy recent results…

RUK Chart

Open-access models may be largely confined to the UK unless Europe forces member states to adopt similar policies. But, with the U.S. also planning similar moves, the publishers will need to adapt.

In May, science minister David Willets told journal publishers gathered at a Publishers Association conference:

“I realise this move to open access presents a challenge and opportunity for your industry, as you have historically received funding by charging for access to a publication,” Willetts told publishers.

“Nevertheless, that funding model is surely going to have to change … To try to preserve the old model is the wrong battle to fight. Look at how the music industry lost out by trying to criminalise a generation of young people for file sharing.”

Many researchers were already revolting against health and science journal publisher Reed Elsevier for selling bundles of journals containing their work, rather than individual journals, to libraries. Tens of thousands of people signed a petition.

Alongside Elsevier in the Reed Elsevier stable is Variety publisher RBI. Bernstein thinks Reed Elesvier, which aborted a planned RBI disposal during the worst of the downturn, should break itself up but that it is more likely to retain an RBI that continues to down-size itself.

Disclosure: Reed Elsevier is an investor in paidContent parent GigaOM through its Reed Ventures arm.

  1. It just changes the game, there are still far too many aspects to adopt and change to enable a full ”open acces” system. This change, potentially beneficial for knolwedge, could also generate many problems too – if handled badly it will create competing infosystems (there are many different ‘open access’ models in play), incompatibility, and a big loss in quality. As has already been shown through a bibliometric analysis of the quality of open access articles. In addition, open access is not a ‘free’ system, you’re merely shifting the costs more directly to the public domain – so instead of the economics of supply/demand by scientists deciding knowledge, it’s going to be decided by politicians and the media (can’t wait for The Sun’s expose of “Useless Research YOU pay for!”). I think scientists’ blinkered and naive views have just thrown them into an even worse scenario. Out of the frying pan, into the fire.

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    1. Yes I think there is alot of niavaty in this debate especialy it its pay to play soluition so its only reasrch subsidized by big players that gets published. The recent Monstering of Bedforshire University in the press is a taste of things to come.

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    2. Alexander D. King Tuesday, September 11, 2012

      I call ‘bullshit’ on the sentence ‘As has already been shown through a bibliometric analysis of the quality of open access articles.’ I have never seen a bibliometric analysis that has a reliable measure of quality–good research well presented. Elsevier has been bilking libraries for millions for several years and they just went too far. Publishing costs are coming down, especially in academic publications, but their subscription prices shot up.

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      1. Bilking? The money bought something. The editorial work and the printing costs money. In many cases, this is a cross-subsidy where the rich institution pay for the journals and the journals then clean up the work of everyone including the poorer institutions. If we trash the editorial workers at Elsevier, the work will fall through to the original authors. The rich institutions will be able to hire ghost writers and editors to make their work look better and the poor institutions will be out.

        Now I’m sure there are a few execs at Elsevier living high on the journal subscription fees, but we shouldn’t forget that the company does do something for its money.

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  2. Sebastian Deterding Monday, September 10, 2012

    It would help as a context to know the – in comparison to any other content business – immense profit margins of STEM journal publishers. Elsevier reported in 2012 £768M profits on £2058M revenue – a margin of 37.3%, consistent with previous years. Hence a 60% loss would still mean a profit margin of about 15%. Compare that to the average profit margin of big fiction/non-fiction book publishers: 10%.

    See http://svpow.com/2012/01/13/the-obscene-profits-of-commercial-scholarly-publishers/

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    1. Good context Sebastian,

      I think RE has been getting a bit of a free ride in this area and owe their 37% margin to that. 10-15% is more reasonable for that business as it stands. Doesn’t mean they can’t innovate and create additional products to push it back up but simply being a gatekeeper on access to scientific research shouldn’t earn that kind of return.

      Kris

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  3. To put this in perspective: a 60% drop in profits from a 30% profit rate is still a very healthy 12% profit rate. Another thought: Elsevier spends quite a bit on lobbying activities. What if they cut this?

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  4. I think it important for Reed Elsevier to comment on this. Otherwise the important point on profitability is not at all balanced. It’s just an attack. Surely there can at least be an attempt to talk to them, and to put that in the article? They have a PR department!

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  5. With Claudio Aspesi providing investment advice, the report is bound to focus on profitability and it may be true that Elsevier and others will, with time, become less profitable as open access becomes more common. The soon this happens the better, becuase the present financial model is unsustainable, and the publishers are fighting back by increasing costs. The logic may prove their downfall.

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  6. Reed Elsevier has a jump start on new market entrants who will use this new freely available data.

    Huge new businesses will spring up to use this data and opportunity. For example, here are some dedicated statistical software R enthusiasts who are creating tools to mine open data sources http://ropensci.org

    In fact, companies like Reed Elsevier should start funding and partnering with rOpenSci and join the new opportunties.

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  7. Writing as an Editor of three international mathematical journals, 2 of which are completely open access via the interent, I would suggest that the problems of Elsevier and their investors are analogous to the problems of candlemakeers at the introduction of gas lighting, of gas producers at the introduction of electric lighting, of ferry owners, when new bridges are built, and so on.

    The quality of the journal is maintained by its Editorial Board, and the referees who work for free, as part of their academic job. The problem with the big publishers is that they give less and less, and expect more and more.

    Ronald Brown http://www.bangor.ac.uk/r.brown

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    1. “The problem with the big publishers is that they give less and less, and expect more and more”.

      Couldn’t this be said of Universities??

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  8. Commercial scientific publishers used to provide a two valuable services: organizing the review process for vetting scientific results and disseminating beautifully type-set expositions of new scientific research by the only means then available, the printed page, .

    The scientific community can now disseminate beautifully type-set expositions of their own work thanks to LaTeX and the internet without the aid of any commercial enterprise, and, in fact, was always able to organize the review process without the help of commercial interests as the many fine journals published by scientific and scholarly societies attest.

    It appears that Elsevier, Springer et al. now have a business model that is based on nothing other than the collection of monopoly rents for the prestige associated with the name of venerable scientific journals they bought up. It is hardly surprising that they are seeing state-support to prop up the foundation of sand on which their profits are based — from corruption of copyright law to support a ’licensing model’, to corruption of the method of funding science by pushing funding agencies to use the self-serving bibliometric models that discount publications and citations in non-commercial publications — and oppose state action which moves toward the natural situation of ideas being shared freely without the intevention for rent-seeking gate-keepers.

    Let the market do its work and kill off companies with unsustainable business models.

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  9. The gold OA takeover scenario is premature at best. The US is not going down this road, nor are the Chinese. At this point the UK is going alone and their proposed APC funding is very low, which the research community has noticed. Asking researchers to pay for something they now get free is a tough sell. It is far too soon to sell off Elsevier. This OA bubble may burst while it is still small.

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  10. As a counterpoint to this article, I suggest that you read Kurt Anderson’s recent article in the Scholary Kitchen entitled
    Are Open Access Initiatives “Catastrophic” for Commercial Publishers?

    See http://scholarlykitchen.sspnet.org/2012/09/14/are-open-access-initiatives-catastrophic-for-commercial-publishers/

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