Software and academic publishing industries: market analysis
This analysis is an attempt to compare the academic publishing market to the enterprise
software market by identifying similarities and differences between them. The conclusion
is that it is hard to draw a comparison because so many aspects of the economics of the
academic publishing market are unique.
Profits and market type
Comparing profit margins between the two industries shows similarities, at least in the
top companies (e.g. Elsevier and Oracle). The industries are similar in that they both rely
heavily on intellectual property to drive profit. In the software industry the high profit
margins are justified by the high level of risk due to competition and high levels of
investment necessary to innovate in such a quickly changing market. But this does not
apply in academic publishing: companies are not investing as much in innovation,
because they are not facing as much risk. This is at least partially because academic
publishing companies are monopolies of the content they sell.
Despite the dominance of market leaders such as Oracle, SAP, and Microsoft (Forbes,
2013), software is not a monopoly content industry like academic publishing because
there are always alternatives, both commercial and open source. This is perhaps the
primary difference between the two markets; software can be considered to be more of a
service industry, a fact which is emphasised by the shift to software as a service (SaaS)
and cloud-based delivery, whereas academic publishing is primarily a content industry.
Compared to other content industries such as trade publishing and the music industry,
commercial publishers’ profit margins are very high. The sound recording and music
publishing industry is in a period of deflation (Office for National Statistics, 2014, p. 29)
and profit margins in trade publishing are currently around 5-13% (Milliot, 2013).
The simplest explanation for this is that despite other content industries also being
monopolies, there is competition in terms of attention for their products. If an album or
movie is too expensive for a consumer they will find an alternative or an illegal free
version. An academic who needs to read a certain research article does not have that
opportunity (unless an open access version exists in a repository).
‘[I]t is clear that the publishers maintain a high profit margin while academic
libraries operate under increasing financial duress. It is the contention of the
authors that price increases and high profit margins are more explainable by the
bargaining power wielded by publishers rather than by cost pressure or because
of high value-added activities on the part of the publishers. (McGuigan & Russell,
2008)’.
The value added by publishers is not enough to justify the kinds of profit margins seen
by Elsevier, Wiley etc., as suggested by a 2005 Deutsche Bank report:
‘We believe the publisher adds relatively little value to the publishing process. We
are not attempting to dismiss what 7,000 people at REL [Reed Elsevier] do for a
living. We are simply observing that if the process really were as complex, costly
and value-added as the publishers protest that it is, 40% margins wouldn’t be
available’ (Deutsche Bank AG, ‘Reed Elsevier: Moving the Supertanker’,
Company Focus: Global Equity Research Report (January 11, 2005) - quoted in
McGuigan & Russell, 2008)
The amount of value added by publishers is a contentious subject but one way of
evaluating it is by analysing the amount of innovation companies undertake.
Innovation
Innovation is central to how enterprise software companies are run. One of the biggest
enterprise software companies is Salesforce.com, which is listed by Forbes as ‘the most
innovative company in America’ (Forbes, 2013). Oracle, the market leader, invests
significant amounts in R&D: 4.5 billion USD in 2012 alone, out of revenues of 37.1 billion
USD (Oracle, 2013, p. 19). Oracle have an operating profit of 37% (Oracle, 2013, p. 37),
a similar level as Elsevier (39%), Wiley (42%), and Taylor & Francis (36%). They invest
billions every year in order to maintain their market position in a competitive market.
This is not the case in the academic publishing industry. The market leaders do not
appear to be driving and significantly investing in innovation. Their annual reports don’t
specify R&D spend so guesses have to be made from their websites and annual reports
about the amount of activity going on in this area, but it appears that publishers are
relying more on acquisitions (which in not included in R&D spend) and platform
improvement.
Wiley, Springer and Taylor & Francis don’t show much sign of innovation in the last
couple of years. They have all invested in open access to a degree but primarily through
acquisitions and introducing a hybrid option. Taylor & Francis’ key investment of 2013
was starting up Cogent OA. Elsevier seem to have more activity in this area (Elsevier,
n.d.) and also bought Mendeley in 2013 for c.69-100m USD. Nature Publishing Group
have also been very active with the activities now grouped around Digital Science
(Stewart, et al., 2012) and the acquisition of Frontiers in 2013. Springer bought BioMed
Central back in 2008 but haven’t introduced much significant innovation since then.
The main activity with regards to digital innovation has been the acquisition of smaller
companies, starting new open access platforms, and embracing web 2.0/collaborative
software (e.g. blogging, post-publication peer review). The second two of these points
are not being driven by the bigger publishers but are their reaction to innovation by
others (e.g. PLOS). Publisher annual reports talk a lot about online platform
developments – Elsevier perhaps being more successful in this than others – but this is
not a priority for purchasers (libraries): they are primarily interested in research content.
In one survey, 90% of academics saw the library’s most important function as a
purchaser of content (Schonfeld & Wulfson, 2013) and this view strongly affects how
librarians view publishers’ products.
So although by this analysis the high profit margins do not seem to be justified and there
should be significant room to drive prices down, this is not the case because of the
fundamental structure of the academic publishing market.
Competition
The enterprise software industry is a competitive market. This drives prices down:
‘competitive pricing plays an important role for software products in addition to demandbased pricing’ (Lehmann & Buxmann, 2009, p. 3). There is significant innovation,
investment, and growth in the market as a whole including among the market leaders.
This is particularly true in SaaS and cloud computing (Columbus, 2013), a new industry
in which the established enterprise software companies are already major players
(Pricewaterhousecoopers, 2014).
This is not the case in the academic publishing industry which has been characterised
as a dysfunctional market due to the lack of competition and control of monopolistic
goods (Shieber, 2009). This inelastic demand means that Elsevier is not subject to the
same market risk as a company like Salesforce. In 2002 a Morgan Stanley report stated
that scientific journals have been fastest growing media sub-sector of past 15 years.
Industry growth has been so good that the OFT believes “the market for STM (science,
technical & medical) journals may not be working well” (Gooden, et al., 2002). This
report forecast that ‘Publishers are moderating price increases … We forecast moderate
cyclical slowdown due to funding pressure. We forecast industry growth slowing from 8%
in 2001 to 3% in 2002 as library budgets come under pressure.’ (p.1). This slowdown did
not happen.
The non-competitive and dysfunctional nature of the academic publishing market has
been well understood for a long time. ‘An economic analysis of the journal industry
indicates that high and discriminatory prices result from the existence of monopoly
power among publishers’ (Stoller, et al., 1996). As Wyly stated in 1998, ‘sustained noncompetitive markets in a mature industry are generally an indication of a structural
problem in the market’ (Wyly, 1998). This is why the OFT reported in 2002 on the
dysfunctional aspects of the STM publishing market (Office of Fair Trading, 2002). The
concerns they highlighted still persist but as yet they have not been officially investigated
further.
All of this means that a straightforward comparison of pricing between the two industries
is not really possible because the underlying factors that guide pricing decisions are very
different.
Inflation
The current inflation rate in the UK is around 2% (based on the CPI). The SPPI
(Services Producer Price Indices), however, has been at <1% growth since 2010. This
may be a more useful starting point for analysing the enterprise software industry. The
Information & Communication sector and Computer Services sub-sector of the SPPI
have also <1% over the same period (Office for National Statistics, 2014, p. 29).
Whether the software industry is in a period of inflation or deflation depends on which
segment of the market you are looking at:
“Traditional IT services and IT hardware spending will continue to be constrained
by the relentless IT spending deflationary environment, where public cloud
(primarily SaaS), mobility, and social are beginning to materially alter the
expected products and services, pricing, and delivery methods of IT.” (Finos,
2014)
There is a trend away from legacy on-premise enterprise software towards SaaS and
shorter procurement cycles (McLellan, 2013). Many analysts see this as evidence of a
deflationary market; for instance “legacy enterprise software vendors are caught in a
deflationary pricing cycle” (Dignam, 2013), and “virtually every emerging software trend
is having a deflationary impact on spend.” (Asay, 2013). However many of the biggest
traditional enterprise software companies are also market leaders in SaaS because they
were able to invest heavily early on.
Deflation in some sectors of the tech industry means that like-for-like, hardware (and
some software) gets exponentially cheaper. It is ‘benign deflation’ caused by technical
innovation and productivity improvements (Selgin, 1999). So to keep revenues high,
companies have to continually offer more, with improved products for the same price
(Hern, 2013). To justify a new procurement cycle of every X years, IT companies have to
be offering both better software and a continued high-quality support service.
To parallel this with the academic publishing industry; in order to justify the high prices of
new deals, should publishers be offering improved services, rather than just more
content? As mentioned above, since libraries’ primary role is often seen as purchasing
content this is probably not a useful way of thinking about the situation. It would be
useful to compare recent purchasing/licensing agreements of both software and journal
subscriptions for individual HEIs, but this would require access to more fine-grained
institutional financial data than we currently have.
Conclusion
The two markets share certain similarities but are fundamentally different in their
structure and organisation. This means that the factors that determine pricing are also
fundamentally different. They are both IP-based industries which higher education
institutions enter into large contracts with. On the other hand, while the software industry
is changing quickly so is seeing high levels of investment, innovation and growth, levels
are much lower in academic publishing. The lack of competition due to inelastic demand
also means that pricing is not subject to the same restraints.
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