Re: Wiley-Blackwell 2009 Subscription and Licensing Options

["Joseph J. Esposito" <espositoj@gmail.com>]

Thomas Krichel's wit is worthy of Swift, but the underlying 
economic principle of his entertaining satire is simply wrong. 
Publishers do not set prices based on costs, even in 
not-for-profits, and they can't, any more than we can slow down 
the speed of light so that the less advantaged can catch up.

Publishers cannot set prices from costs because they do not know 
what those costs are.  They establish prices, to a greater or 
lesser degree of sophistication, through an assessment of the 
markeplace. This is not because publishers are ignorant of the 
structure of their own operations (though some have faulty or 
incomplete analyses of those costs), but because the costs are 
unknowable.  Publishers, including not-for-profit publishers, 
base their decisions on market forecasts, and they do so even 
when they think they are simply adding some margin to costs.  As 
William Goldman famously said, Nobody knows anything.

If this sounds inordinately cranky or mysterious, consider what 
it would mean to "get at" the costs.  Imagine the publisher of 
ten journals, whose fixed costs (staff, rent, etc.) run at $5 
million a year.  (I am ignoring variable costs--paper, printing, 
bandwidth, etc.-- for this discussion.) How to allocate those 
fixed costs to each journal?  A discussion thus ensues about 
whether the overhead is to be allocated equally or by some other 
measure (e.g., Journal A gets a higher allocation than Journal B 
because the art department puts more work into it).  In the end 
you come up with a figure for costs that is derived from an 
economic model for assessing overhead.  The "cost" is an economic 
abstraction.  This is a small part of the reason that nobody 
knows anything.

The larger part is that the abstraction known as "cost" has to be 
applied to unit sales:  it is necessary to forecast (using a 
mathematical model) how many customers will be found, when they 
will sign up, and how rapidly they will pay their bills.  Let's 
suppose that Journal B of the example above had allocated costs 
of $300,000.  Will this journal reach 500 paying customers? One 
thousand?  Two thousand?  If we knew what the costs were, we 
wouldn't have to ask this question, but the cost is not a real 
item but an element of a dynamic economic model.  With a forecast 
(How reliable is that crystal ball?) of 500 customers, Journal B 
has an imputed cost of $600/unit.  With a forecast of 1,000 
customers, the "cost" is cut in half.  To which figure does a 
publisher add on margin?  At every moment the publisher is making 
decisions not from the inside out (costs to the marketplace) but 
outside in (from a forecast about the marketplace in to an 
assessment of the utilization of organizational resources). 
This yields the basic paradox of a scalable business such as 
publishing:  the best way to reduce costs is to sell more copies.

There are times when publishers can and do ignore this situation, 
and that is when the market forecast is a constant.  Let's 
suppose that Journal C has an imputed overhead of $200,000, has 
been published for years, and has for at least 5 year or 
thereabouts had the same number of subscribers--say, 1,000. 
With such a stable market condition, the publisher assumes costs 
of about $200 per unit and then adds on some margin to that. 
Without that stable market condition, however, this method does 
not work.  The limitations of this shorthand should be clear: 
it is impossible to introduce a new product using it, as new 
products require market forecasts, which vary; and products in 
dynamic markets (a growing or diminishing number of customers) 
require that publishers revisit their economic models regularly. 
If you happen to believe, as I do, that the number of current 
publications and content types is but a tiny fraction of what we 
will be seeing in the years ahead, the "cost-plus" shorthand is 
of negligible utility.

This thread began with Fred Friend asking, Why does the stuff 
cost so darn much?  It's a reasonable question.  But we can't get 
to an answer by impugning people's motives or engaging in 
financially unsophisticated arguments.  The crisis of scholarly 
communications is that a small number of people want a real lot 
of stuff.  It is thus a small and expensive market to serve.

Joe Esposito


----- Original Message -----
From: "Thomas Krichel" <krichel@openlib.org>
To: <liblicense-l@lists.yale.edu>
Sent: Friday, October 03, 2008 3:28 PM
Subject: Re: Wiley-Blackwell 2009 Subscription and Licensing Options

> Joseph Esposito writes
>
>> I suppose there are some publishers who justify prices based on
>> the costs incurred, but I have never met any of them.
>> Publishers typically justify prices (if they feel the need to
>> justify them) based on the value of the products.
>
> I suppose there are some publishers who justify prices based on
> the value provided, but I have never met any of them. I doubt
> I'll meet any of them soon. How would a publisher be able to set
> a dollar amount for that value in any objective way?
>
> Cheers,
>
> Thomas Krichel                    http://openlib.org/home/krichel
>                               RePEc:per:1965-06-05:thomas_krichel
>                                              skype: thomaskrichel