Open Access Threatens Academic Publishers

Includes: AXELF, ENL, JW.A
by: Shareholders Unite

One of the worlds best business model is about to be 'disintermediated.' Academic publishing has been very lucrative for a very long time, but we might be close to the tipping point where that becomes increasingly problematic.

Here is how it usually goes. Universities, most of them financed by taxpayers, employ professors who together publish some 1.5 million(!) scientific articles a year in a race to further their status, career, and science in the process (well, that's the idea anyway). The articles go through a process of 'peer review,' which is mostly volunteer work, in order to guarantee quality.

That system isn't without disadvantages (try to get some non mainstream economic model published in one of the top tier economic journals), but here isn't the place to debate that, it is probably the best system around. But it has a rather steep price.

Not only is most academic research funded by the taxpayer, as academics don't get any monetary reward for publishing (or peer reviewing) in the journals, these are funded by the taxpayer in another way, through university library subscriptions.

These costs can be steep:

According to David Prosser, executive director of Research Libraries UK, British universities spend around £200m a year on subscriptions to electronic databases and journals, which is around 10% of the block grants the institutions receive from government. The exact prices paid by university libraries are covered by confidentiality clauses with publishers but Prosser said that many of Britain's big universities "are spending, with some of our largest publishers, more than £1m a year each". [The Guardian]

So you see that most countries fund academics, who are in fierce competition to fill these journals with free content, for which taxpayers, apart from funding the universities that employ these busy bee academics, also fund the academic libraries that buy the content. That has to be a good deal, for the publishers of these journals, the Elsevier (ENL), Springer (OTC:AXELF), and Wiley's (JW.A) of this world. Together they publish 42% of journal articles.

Indeed, profit margins of more than 35% are by no means the exception. Despite some initiatives to get around this awful monopolistic process, setting up freely accessible articles on the net, the stranglehold of the big academic publishing houses (and their profit margins) is as strong as ever.

This is because they have cornered the top journals which are most important to the academic community, and prohibit any of this material to appear anywhere else with indefinite copyrights. For instance, try your luck as a non-academe, and you'll have to fork over idiotic prices per article (Elsevier charges $31.50, Springer 34.95 euro and Wiley-Blackwell $42 per article, for each article whether you want 1 or 10).

So much for open science and the spread of knowledge! Even Murdoch allows you to download all you can from the Times at one pound per 24 hours and pays his own journalists.

But rising cost (academic libraries spend up to 65% of their budgets on journal subscriptions and often are compelled to buy packages, even if they don't want many of the journal subscriptions that these contain), the increasing public domain of free science, and sheer frustration with the academic publishers might have reached a tipping point.

Now, the Wellcome Trust, the world's second largest funders of science had enough of the Elseviers of this world and is throwing its weight behind a growing campaign to break the stranglehold of academic journals and allow all research papers to be shared online.

Nearly 9,000 researchers have already signed up to a boycott of journals that restrict free sharing as part of a campaign dubbed the "academic spring" by supporters due to its potential for revolutionizing the spread of knowledge. [The Guardian]

While the slick marketing language of the three publishing houses will fool nobody, their stranglehold on the best journals might still be too much of a barrier to take, as it is in any academic's personal interest to get published in these venerable journals, rather than in some forum online. However, while immediate victory seems unlikely, the tide is definitely turning, especially when government (who, after all, funds these publishing houses twice) will shift its stance.

So we think that a short position on the end of one of the most scandalous, but also most profitable business models around could pay-off, long-term. No immediate heroics are to be expected, although one could argue that one should short these companies in the name of free access to the science that we as taxpayers fund.

As you can see below (three year chart), Reed-Elsevier isn't exactly a growth stock anymore as their customers get ever poorer.

Wiley-Blackwell has done a little better:

Axel Springer hasn't done any better. In fact, quite the contrary, as it happens but they have a dominant position in German newspapers as well, which isn't quite such a good business model, to put it mildly. Here is the 5 year chart for the German notation:

The 'crash' in June 2011 is actually a 3:1 stock split

So if these shares haven't really done much with a killer business model, when that business model itself is coming under increasing attack their shares will start to suffer as well.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in ENL over the next 72 hours.