The Economics of Electronic Publishing: A View from the University of California Press
The market realities described in the first portion of this paper are sobering, but the basic outlines have been well known to libraries and scholarly publishers for more than a decade. This section discusses the realities for nonprofit journal pub-
lishers (university presses and scholarly societies) as a way of answering the question "So why don't publishers just reduce their prices-at least for electronic publications?" Although the focus is on nonprofit presses, the basic economics are equally true for commercial publishers, except that they require profits and have the considerable advantage of greater access to capital to fund innovation.
The largest constraint on all publishers' ability to radically change the price structure for electronic publications is the first-copy costs, which commonly range from 70% to 85% of the print price (see Table 18.1 for an example of first-copy costs for University of California Press journals).
These first-copy costs will remain whether the format is electronic, paper, or both. Any pricing model must provide sufficient income to cover these costs in addition to the unique costs associated with publishing in any particular medium. Publishers are not wedded to maintaining print revenues per se but to maintaining enough revenues to cover their first-copy and unique-format costs and to cover the costs of the technological shift. In the transition period, when both print and electronic editions must be produced, this objective will inevitably result in prices that are higher than print-only prices. Whether wholly electronic publications are, in the long run, more economical will depend on the costs of producing a uniquely electronic product and on the size of the market. If substantially fewer libraries subscribe to electronic publications than subscribed to their print predecessors, the cost per subscription will inevitably increase in order to cover a larger share of first-copy costs.
Electronic Pricing Models
There are a number of models for pricing electronic resources. But all of them boil down to various ways of obtaining revenue to cover the same set of costs. They all ultimately depend on the same formula of first-copy costs plus print costs plus electronic costs. Table 18.2 shows humanities journal x.
Electronic Access Provided "Free" Publishers that are providing electronic access "free" with print subscriptions are, in fact, subsidizing the costs of the electronic edition out of the surplus revenues generated by the print publication; the print publication already covers the first-copy costs allocated to each subscription. For relatively high-priced scientific journals with high first-copy costs, this subsidization can be done without inflating the price too substantially; the uniquely electronic costs are then subsidized by all institutional subscribers and hidden as a percentage of the total cost of publication. Because the basic subscription price is high enough, relatively modest additional increases will also cover the cost of lost individual subscriptions (since individual subscriptions typically cover the run-on costs of producing additional issues but make only a partial contribution to first-copy costs). This approach has the added advantage of sidestepping for now the problems of negotiating prices and guarantees with libraries (and the associated
overhead costs). However, it does not contribute to developing commonly understood and agreed upon cost recovery models that will cover the costs of electronic scholarly communication in the long run.
Extra Charge for Electronic Access, Bundled with Paper An electronic edition that is provided with a print subscription for an extra charge is essentially the same as the previous cost recovery model, but the increase to cover electronic costs is made explicit. This approach may be especially necessary for journals whose base rate is low and whose markup for electronic costs cannot be covered by a typical inflationary increase. This model still has the advantage, for publishers, of spreading the cost over all institutional subscribers and of simplifying licensing negotiations.
Negotiated Price by Library Based on Paper Subscription Base Some publishers take the basic institutional print subscription base and guarantee this revenue for a period of years (typically three). Publishers are willing to guarantee limits to inflationary increases for this period in exchange for the guaranteed income and protection from cancellations to help cover transition costs. Again, this approach works better with higher priced journals for which the added costs of electronic publishing are a smaller proportion of the total cost.
Separate Price and Availability for Electronic and Paper, with an Incentive for Bundling Offering paper and electronic editions separately but with an incentive for bundling is the method deployed by SCAN and by Project MUSE. This model offers more flexibility to libraries, because libraries are allowed to cancel print and take only electronic or to select among the publications offered. Discount incen-
tives encourage maintaining paper and electronic subscriptions (a strategy used by both projects) and ordering larger groups of journals (the entire list for MUSE; discipline clusters for SCAN). The advantage to this approach is that the costs of electronic publishing are made clear. (See the revenues section below for a discussion of the adequacy of this model for supporting humanities publishing in the long run and of the impact of consortia discounts.)
In all these models, the ultimate economic effect in the transition period is the same: costs for libraries go up. Publishers must cover their first-copy costs; continue to provide paper editions for individuals, many libraries, and international markets; and generate revenue to cover the infrastructure and overhead costs of electronic innovation. For nonprofit publishers, at least, these costs must all be supported by the revenues from current journal subscriptions.
It is likely, in the long run, that eliminating print editions entirely will reduce costs somewhat for some kinds of journals. However, for journals that are trying fully to exploit the new capabilities offered by electronic technologies, it seems likely that the additional costs of generating links, specialized formats, and so on will continue to cost as much, or nearly as much, as the cost of printing and binding. But even for simpler humanities journals, the experience at the University of California Press raises questions about the assumption that ongoing electronic costs will be substantially lower.
Covering Costs of Development The University of California Press's original economic model assumed that the development costs were largely one-time expenses and that there was a single learning curve and set of skills to master, after which electronic publishing would be largely routinized; additional expenses would be easily absorbed by the margin generated by the savings in the paper edition. On the basis of the past three years, it seems apparent that this assumption was flawed. UC Press dedicated 3,500 staff hours on the SCAN project in 1994 (gopher site development); 4,100 hours in 1995 (WWW site development); and 3,700 hours in 1996 (largely on WWW development and on laying the groundwork for SGML implementation). It is apparent from ongoing trends in technological innovation that Internet technology and expectations for electronic publishing will continue to evolve very rapidly for at least the next 20 years. The Press's "bad luck" in initially developing for an outmoded platform (gopher) is an inevitable occurrence over the long term for electronic publishing projects. As a result, it seems foolhardy to assume that substantially less investment will be necessary for technical research, experimentation, and site redesign and revision in the future. Any viable economic model for the University of California Press must thus assume one or two technical FTE positions as part of ongoing overhead. (Please note that these positions will not include file server maintenance and enhancement, since the
costs of file service for the SCAN project are presently borne by University of California/Berkeley Library.)
The SCAN project has experienced ongoing instability in technical staff at the library and at UC Press. Being located in a region with such a strong hightechnology industry has actually proven to be a disadvantage, since current and potential employees can make so much more money at other jobs. This situation results in long staff vacancies and repeated training on the specifics of the project. In this way, the project again faces not one but rather a continual series of learning curves.
There is a third implication to this vision of a constantly evolving future. Functionality and continually changing platforms, combined with the Press's commitment to archiving and to long-term responsibility for viable electronic access, demand implementation of a coding system that is totally portable and highly functional. As a result, the commitment to SGML seems more and more wise as time goes on. This commitment leads the Press to reject image-based solutions like Acrobat, which would require less work and which would be faster to implement but which do not have long-term migration paths. Having experienced the painful process of completely receding individual files, the Press does not want to face the same problem with a much larger set of files in the future. The necessity and the difficulty of repeated conversions of legacy text is sadly underestimated by many publishers and librarians. Scaleability, an important and underrated issue in any case, becomes even more vital in a scenario in which larger and larger amounts of material must be converted each time the technological environment evolves.
Electronic publishing is adding new duties (and requiring new resources) within the Press, without removing present duties. For example, the Press has added .5 FTE in the journals production staff (a 25% increase) to handle liaison with suppliers, scanning and archiving of all images being published, archiving of electronic files, and routine file conversion duties. This position will clearly grow into a full-time position as all the journals are mounted on-line; only the slowness of the on-line implementation permits the luxury of this low staffing level. The seven people working on Project MUSE or the seven people working on The Astrophysical Journal Electronic Edition confirm this assumption. In addition, clearing electronic rights for images in already published books and journals and maintaining an ongoing rights database creates a new staff responsibility, since many rights holders are requiring renewal of rights and payments every five to ten years. The need for technical customer support is still unknown but surely represents some portion of an FTE.
Marketing is another area requiring addition of new expertise and staff. Successfully selling electronic product requires a series of changes within the publishing organization. The marketing necessary to launch a new print journal successfully or to sell a book is expensive and time-consuming, but the approaches and tasks are familiar and can be performed by existing marketing staff as part of their
existing marketing jobs. In contrast, successfully establishing a customer base of licensed libraries for electronic product requires new skills and abilities, a substantial staff commitment, a higher level of staff expertise and authority, and substantial involvement from the licensing libraries. Marketing electronic services requires all the brochures and ads that print publications do. In addition, it requires substantial publicity efforts, a travel schedule to perform demonstrations at a wide range of library and end user meetings, and participation in appropriate LISTSERVs. There must be at least one staff member who has the requisite knowledge and authority and who can dedicate a large portion of time to outreach, negotiations, and liaison with potential and actual license customers and subscription agents. There are also demands for ongoing customer relations work, including the provision of quarterly or annual use reporting. The Press has found it very difficult to fit those new functions into its traditional marketing and distribution job descriptions and workloads. As the Press moves more seriously into electronic publication of current season books, it will surely need to hire a new person to market on-line books; these functions cannot possibly be integrated into the already busy jobs of books marketing professionals with their focus on current season bookstore sales.
In short, the Press anticipates a permanent addition of at least three or four full-time staff to the overhead of the publishing operation. For now, some of these positions are covered by the Mellon Foundation grant, and some of them have been deferred (to the detriment of the project), but in the long run the electronic publishing model must absorb this additional $200,000 in annual costs.
Finally, UC Press and the UC Library have just begun to step up to the costs of long-term archiving, including periodic refreshing of technology and the requisite reconversion of files-another argument for structured standardized coding of text.
Income for Electronic Product
Unfortunately, in a period when electronic publishing generates additional costs that must be funded, several trends apparent in the emerging purchase patterns of electronic products limit the income available to support publication costs and create further pressures on publishers to increase prices.
Slowness to Adopt University presses attempting to sell electronic product directly (as opposed to bundling it automatically in the paper price and offering "free" access) are finding that sales to universities are progressing more slowly than projected. Project MUSE sales, for example, are at 378 after two years; sales to MIT's electronic-only journals hover at around 100; in no case are there more than 50 library subscriptions. There are under 25 subscriptions to the online edition of The Cigarette Papers at the University of California/San Francisco Library's Brown and Williamson Tobacco site after nine months (http://www.library.ucsf.edu/tobacco/cigpapers/ ). Sales to SCAN are a handful (although access
has been restricted for less than one month at the time this paper is written). Even for publications for which no additional charge is being made, library adoptions are slow in coming. The Astrophysical Journal Electronic Edition, for example, has 130 libraries licensed to date. There are, of course, good reasons for this slowness: libraries face the same difficulties in building infrastructure, funding, and staff expertise that publishers do. But the low sales nevertheless make funding the transition more difficult, because publishers can't count on sales income from the electronic product to help to cover the costs of electronic publication. The growth curves to which publishers are accustomed from launching paper journals (even in this age of low library adoptions) are too optimistic when applied to electronic publications. This slowness has real consequences for funding electronic innovation.
New Discount Structures Emerging business practices and discount expectations lessen the income per subscribing institution (at the same time that the efforts necessary to obtain that subscription are intensified). The expectations of consortia for deep discounting (both for number of consortia members and for adopting a bundle of publications) can go as high as 40% for academic institutions, with nontraditional markets receiving even deeper discounts. If 70-85% of the list price represents first-copy costs, a 40% discount means that these subscriptions are no longer carrying their full share of the first-copy costs. Deep discounting cannot be a long-term pricing strategy.
In addition, other consortial demands (for example, demands that inflationary increases not exceed a certain percentage for several years or that access be provided to high schools free of charge) further lessen the ability of publishers to fund electronic innovation out of electronic product sales. Again, it is easy to empathize with these library positions and to understand why they are evolving. But these efforts by libraries to control costs actually have an inflationary pressure on overall prices, since the base price must increase to make up the losses.
Loss of Subscriptions Publishers are also worried about losing subscriptions. Some losses will surely happen. At a minimum, subscriptions will be reduced by another major wave (or waves) of cancellations as libraries try to cope with the ongoing costs of paper and electronic subscriptions from the major commercial science publishers and by the loss of any duplicate subscriptions still remaining on campuses. In addition, publishers are haunted by the potential for substantial shrinkage of individual subscriptions or society memberships as more and more scholars have "free" access from their campuses, though loss of individual subscriptions is less sure than library cancellations. (By December 1996, almost 60% of SCAN uses were coming from U.S. non-.edu addresses as more and more people obtain access from home workstations; it is possible that individuals will pay for the convenience of noncampus access, just as they now do for nonlibrary print access.) Nevertheless, because individual subscriptions play an increasingly important role in financing many journals (especially journals launched within the past
ten years, when library support has been so eroded), widespread cancellation would have a substantial impact that would force journal prices higher.
Possible Increases in Sales Two possible new revenue sources may somewhat balance the losses in income described above, although both are highly speculative at this point. First, publishers may obtain new institutional markets and wider distribution as consortia bring institutions like junior colleges and high schools to scholarly publications. Project MUSE has begun to see this trend. It is not clear, however, that these customers will be long-term subscribers. Given the present nature of scholarship, many of these new subscribers may conclude that any amount of money is too much to pay after two or three years of low use statistics, especially when on-demand access by article becomes widely available. There will be a substantial market for scholarship at junior college, high school, and public libraries only when the possibility of wider audiences through the Internet fundamentally changes the ways in which scholars write and present their work-a change that will surely take many years to materialize. Other publishers are more optimistic about this potential source of income.
Second, a substantial revenue stream may exist in sale of individual chapters and articles to scholars whose institutions do not have access, who do not have an institutional base, or who are willing to pay a few dollars for the convenience of immediate access at their workstations (people who are now presumably asking their research assistants to make photocopies in the stacks). And there may be substantial sales among the general public. This new product may represent enough income to relieve some of the pressure on journal finances, if the process can be entirely automated (at $6 or $7 per article, there is no room for the cost of an employee ever touching the transaction). This solution needs substantial traffic, because it takes seven or eight article sales to cover the first-copy costs of one typical humanities subscription.
Of course, the ability to purchase single chapters or articles will also diminish subscription revenues, as some libraries choose to fill user needs on demand and to cancel their present subscriptions. It is too soon to tell what the mix of new audiences and subscription cancellations will be, and whether the revenue stream from new sources will replace that from canceled subscriptions.
Aggregators So far, the models we have examined have all assumed that the publisher is providing access to electronic resources. Publishers could, of course, avoid many of these costs by providing electronic files to aggregators and leaving marketing, file service, file conversion, and archiving to outside suppliers who would provide a single point of purchase for libraries and individuals. This scheme offers a number of advantages from a library point of view. The instant connection between search engine and ordering ability that the larger services like UnCover and OCLC offer may potentially bring more end users.
But from a publishing point of view, this model has two very large disadvantages. The first is strategic. In an electronic world, one of the major values that
publishers have to offer is the branding value of our imprints as symbols of excellence resulting from peer review and gatekeeping functions, which will be ever more valuable in the time-starved world of the Internet. This brand identity is inevitably diluted in an aggregated world, especially if the aggregator is handling marketing and distribution.
Second, and more relevant to the discussion at hand, it is hard to see how the royalties most typically offered by aggregators (for institutional licenses or for ondemand use) can begin to replace the revenue lost from direct subscriptions. A 30-40% royalty does not cover first-copy costs of 80%. Only by retaining the entire fee can publishers hope to generate enough revenue for on-demand sales to make a sufficient contribution to the costs of publication. A wide-scale move to aggregation would have the effect of making the first-copy costs for the few remaining subscriptions very large indeed, in addition to reducing the perceived value of what we sell (yes, it is possible for a humanities quarterly to cost $1,200 annually!).
The University of California Press and most other nonprofit scholarly publishers would like nothing better than to price electronic products substantially lower than print. However, the low margins under which they operate, the demands of users that print continue to be provided, the high first-copy costs typical of scholarly publishing, the need to fund the development of electronic product, and the expenses of producing full-featured electronic publications all mitigate against low prices, at least during the transition period.