RE: A word on calculating costs

["D Anderson" <dh-anderson@corhealth.com>]

Joe makes a good point about the source of publishing profits. Elsevier's
ability to squeeze profits from declining product lines likely comes from
the consolidation of costs after acquisitions.

Another factor to keep in mind is that for many companies, profit comes
from developing superior business processes. Wal-Mart, for example, has
spent billions of dollars on developing effective business processes that
provide the retailer with a competitive advantage. The more stores
Wal-Mart operates, the broader the base on which to spread these
development costs, and the more Wal-Mart can spend in developing business
processes that provide a competitive advantage.

Likewise, effective publishers have invested in developing business
processes that produce high quality products while optimizing the use of
resources. By adding value to the process, publishers earn profits. In
essence, profit rewards publishers for their accumulated expertise
developed over years of publishing, as long as that expertise translates
into value for customers. It should be noted that publishers that are
unable or unwilling to develop effective business processes may still be
able to generate short-term profits by cutting costs in ways that hurt the
quality of content or service to customers.

Another aspect of profit is cost of capital. Publishers need capital to
build their publishing infrastructure and develop their business
processes. This capital comes at a cost, and the cost is either interest,
in the case of borrowed funds, or profit, in the case of equity funding.
Profit is necessary to "purchase" this capital.

No matter where working capital comes from, there is a cost. For example,
if an educational institution provides the working capital for an in-house
journal and doesn't charge the journal for the capital, the institution
still incurs a cost: the cost of foregone interest or profits that this
capital would have earned if invested elsewhere. For the institution, the
prestige of publishing the journal may be a sufficient return, but it
comes at a cost.

Dean H. Anderson

COR Health
Insight ... not just news 
http://www.corhealth.com 
 
-----Original Message-----
[mailto:owner-liblicense-l@lists.yale.edu] On Behalf Of Joseph Esposito
Sent: Tuesday, January 04, 2005 6:39 PM
To: liblicense-l@lists.yale.edu
Subject: A word on calculating costs

I am responding to only one point in David Goodman's recent post, which
was in itself a response to Phil Davis's interesting analysis of costs and
prospective payments for research publications . . .

. . . JE:  I don't wish to quarrel with these figures specifically, but it
should be noted that *almost all* profit from publishing journals comes
from so-called back-office consolidation.  For those on this list who are
unfamiliar with business-speak (enviable folks), the back office is that
part of a business that is mostly invisible to the end-users of the
product. The back office typically includes such things as accounting, IT,
internal audit, real estate management, the human resources department,
etc.  It does not include editorial or marketing.  When one journals
publisher acquires another (an act of consolidation), the back-office
operations typically are merged or consolidated, reducing the overall cost
per journal; hence the cost per article.  It is almost impossible to make
money with a limited-circulation journal if you only have a single one.  
You simply cannot charge enough to the universe of, say, 1,000 subscribers
to cover your overhead.  But when you have 20 journals you have a chance
at making money; 100 journals is better; and it should be clear to one and
all why Elsevier has 1,400.  If Elsevier's journals were all published by
stand-alone companies, I doubt any of them would make any money.  
Elsevier's profits, in other words, are a function of mergers and
acquisitions and the consequent streamlining of operations.  I know
Elsevier has few fans on this list, but the company is simply brilliant at
managing acquisitions.  (John Wiley may be even better.)

So when we talk about moving to some form of Open Access publishing with
the aim of reducing costs, we should also consider who would underwrite
the mergers and acquisitions that make cost-savings possible.  Surely not
the shareholders of Elsevier, who will by this time have put their captial
into, say, hog bellies or for-profit educational companies (e.g., Apollo).  
It seems more likely that these cost-savings will disappear.  Therefore,
in discussing the cost per article under an OA regime, we should not
expect to transfer publishers' profits back to the research community.

-- Joe Esposito