RE: Wiley-Blackwell 2009 Subscription and Licensing Options

["Nawin" <nawin.gupta@comcast.net>]

Speaking as a journal publisher, I echo the views already 
expressed that journal publishers do not set prices based on 
costs, however, they do track revenues and costs to assess value 
and profitability.  It is customary for most journal publishers 
to track P&L of journals portfolio at the journal level, 
allocating indirect costs to individual journals based on 
established measures and drivers.  Art of managing a portfolio is 
to maximize the reach, readership, and revenues (and, yes, 
profitability) of the portfolio and, to the extent possible, each 
individual journal.  For example, a start-up journal may be 
priced low or, in another instance, a journal may lose money but 
provides value to portfolio as a whole.

Pricing of the journal is not in cost-plus, it is in the value it 
provides in the competitive marketplace and is further guided by 
publisher's business model/strategy for the journal.  For 
example, limited market at higher price or larger market at lower 
price, and what other revenue opportunities (such as advertising) 
a larger circulation may offer.

Nawin Gupta
nawin.gupta@comcast.net
www.nawingupta.com

-----Original Message-----
From: owner-liblicense-l@lists.yale.edu
[mailto:owner-liblicense-l@lists.yale.edu] On Behalf Of Joseph J. Esposito
Sent: Monday, October 06, 2008 5:12 PM
To: liblicense-l@lists.yale.edu
Subject: Re: Wiley-Blackwell 2009 Subscription and Licensing Options

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