The evolution of the digital arena will be strongly influenced by cost and by pricing policies. Cost is always a two-way street, a reflection, on the one hand, of the choices of authors and publishers who commit resources to publication and, on the other, of the choices of readers and libraries who perceive value. Publishers are challenged to harvest raw materials from the digital ocean and fashion valuable information products. Universities and their libraries must evaluate the possible ways of using digital materials and restructure budgets to deploy their limited resources to best advantage. Between publisher and library stands the electronic agent who may broker the exchange in new ways. Consider first the publisher.
The opportunity to distribute journals electronically has implications for the publishers' costs and revenues. On the cost side, the digital documents can be distributed at lower cost than paper. The network may also reduce some editorial costs. However, sustaining high production values will continue to involve considerable cost because quality editing and presentation are costly. On the revenue side, sale of individual subscriptions may, to some degree, yield to licenses for access via campus intranets and to pay-per-look services.
The central fact of the publishing business is the presence of substantial fixed cost with modest variable cost. The cost of gathering, filtering, refining, and packaging shapes the quality of the publication but does not relate to distribution. The cost of copying and distributing the publication is a modest share of the total expense. A publication with high production values will have high fixed costs. Of course, with larger sale, the fixed costs are spread more widely. Thus, popular publications have lower cost per copy because each copy need carry only a bit of the fixed cost. In thinking about a digital product, the publisher is concerned to invest sufficiently in fixed costs to generate a readership that will pay prices that cover the total cost.
There is a continuum of publications, from widely distributed products with high fixed costs but lower prices to narrowly distributed products with low fixed costs but higher prices. We might expect an even wider range of products in the digital arena.
To understand one end of the publishing spectrum, consider a publisher who reports full financial accounts and is willing to share internal financial records, namely, the American Economic Association (AEA). The AEA is headquartered in Nashville but maintains editorial offices for each of its three major journals in other locations. The AEA has 21,000 members plus 5,500 additional journal subscribers. Membership costs between $52 and $73 per year (students $26), and
members get all three journals. The library rate is $140 per year for the bundle of three journals. The association had revenues and expenditures of $3.7 million in 1995.
The AEA prints and distributes nearly 29,000 copies of the American Economic Review (AER), the premier journal in economics. The AER receives nearly 900 manuscripts per year and publishes about 90 of them in quarterly issues. A Papers and Proceedings issue adds another 80 or so papers from the association's annual meeting. The second journal, the Journal of Economic Perspectives (JEP), invites authors to contribute essays and publishes more topical, less technical essays, with 56 essays in four issues in 1995. The third journal, the Journal of Economic Literature (JEL), contains an index to the literature in economics that indexes and abstracts several hundred journals, lists all new English-language books in economics, and reviews nearly 200 books per year. The JEL publishes more than 20 review essays each year in four quarterly issues. The three journals together yield about 5,000 pages, about 10 inches of linear shelf space, per year. The index to the economic literature published in JEL is cumulated and published as an Index of Economic Articles in Journals in 34 volumes back to 1886 and is distributed electronically as EconLit with coverage from 1969. The Index and EconLit are sold separately from the journals.
This publisher's costs are summarized in Figure 6.1. Some costs seem unlikely to be affected by the digital medium, while others may change significantly. The headquarters function accounts for 27% of the AEA's budget. The headquarters maintains the mailing lists, handles the receipts, and does the accounting and legal work. It conducts an annual mail ballot to elect new officers and organizes an annual meeting that typically draws 8,000 persons. The headquarters function seems likely to continue in about its current size as long as the AEA continues as a membership organization, a successful publisher, and a coordinator of an annual meeting. Declining membership or new modes of serving members might lead to reduction in headquarters costs. In the short run, headquarters costs are not closely tied to the number of members or sale of journals.
The AEA's second function is editing, the second block in Figure 6.1. Thirty-six percent of the AEA's annual expenditures goes to the editorial function of its three journals. Eighty-eight percent of the editorial cost is for salaries. The editorial function is essential to maintaining the high production values that are necessary for successful information products.
Operating digitally may provide some cost saving in the editorial function for the American Economic Review. The editors could allow manuscripts to be posted on the Internet, and referees could access network copies and dispatch their comments via the network. The flow of some 1,600 referee reports that the AER manages each year might occur faster and at lower cost to both the journals and the referees if the network were used in an effective way. However, the editorial cost
will continue to be a significant and essential cost of bringing successful intellectual products to market. Top quality products are likely to have higher editorial costs than are lower quality products.
The top two blocks shown in Figure 6.1 describe the 38% of the AEA's total budget that goes to printing and mailing. These functions are contracted out and have recently gone through a competitive bid process. The costs are likely to be near industry lows. The total printing and mailing costs split into two parts. One part doesn't vary with the size of the print run and is labeled as fixed cost. It includes design and typesetting and thus will remain, to a significant degree, as a necessary function in bringing high quality products to market. The variable-cost part of printing and mailing reflects the extra cost of paper, printing, and mailing individual paper issues. This 23% of total association expenditures, $800,000 out of $3.7 million total, might be reduced considerably by using distribution by network. However, as long as some part of the journal is distributed in print, the association will continue to incur significant fixed costs in printing.
In short, distribution of the journals electronically by network might lower the AEA's expenditures by as much as 23%.
Figure 6.2 summarizes the American Economic Association's revenues in six categories. Thirty-eight percent of revenue comes from individual memberships. Another 5% comes from the sale of advertising that appears in the journals. Nineteen percent comes from the sale of subscriptions, primarily to libraries. Another 19% comes from royalties on licenses of the EconLit database; most of these royalties come from SilverPlatter, a distributor of electronic databases. Less than half of one percent of revenues comes from selling rights to reprint journal articles. Finally, 18% of revenues come from other sources, primarily income from the cumulated reserves as well as net earnings from the annual meeting.
Distributing the journals electronically by network seems likely to change the revenue streams. What product pricing and packaging strategies might allow the AEA to sustain the journals? If the journals are to continue to play an important role in the advance of the discipline, then the association must be assured that revenue streams are sufficient to carry the necessary costs.
If the library subscription includes a license for making the journals available by network to all persons within a campus, then a primary reason for membership in the association may be lost. With print, the main distinction between the library subscription and the membership subscription is that the member's copy can be kept at hand while the library copy is at a distance and may be in use or lost. With electronic delivery, access may be the same everywhere on the campus network. The license for electronic network distribution may then undercut revenues from memberships, a core 38% of AEA revenues.
The demand for advertising in the journals is probably motivated by distribution of journals to individual members. If individual subscriptions lag, then advertising revenue may fall as well. Indeed, one may ask the deeper question of whether ads associated with electronic journals will be salient when the journals are distributed electronically? The potential for advertising may be particularly limited if the electronic journals are distributed through intermediaries. If a database intermediary provides an index to hundreds of journals and provides links to individual articles on demand, advertising revenue may accrue to the database vendor rather than to the publisher of the individual journal.
The AEA might see 43% of its revenues (the 38% from member fees plus the 5% from advertising) as vulnerable to being cannibalized by network licensure of its journals. With only a potential 23% saving in cost, the association will be concerned to increase revenues from other sources so as to sustain its journals. The 20% shortfall is about $750,000 for the AEA. Here are three strategies: (I) charge libraries more for campus-use licenses, (2) increase revenues from pay-per-look services, (3) enhance services for members so as to sustain member revenues. Each
of these strategies may provide new ways of generating revenue from existing readers, but importantly, may attract new readers.
The Campus License The association could charge a higher price to libraries for the right to distribute the electronic journals on campus networks. There are about four memberships for each library or other subscription. If membership went to zero because the subscriptions all became campus intranet licenses, then the AEA would need to recoup the revenues from four memberships from each campus license to sustain current revenues. If network distribution lowered AEA costs by 20%, then the campus intranet license need only recoup the equivalent of two memberships. Libraries currently pay double the rate of memberships, so the campus intranet license need be only double the current library subscription rate. That is, the current library rate of $140 would need to go to about $280 for a campus-wide intranet license for the three journals. Of course, many campuses have more than one library subscription, say one each in the social science, management, law, and agriculture libraries. The association might then set a sliding scale of rates from $280 for a small (one library print subscription) campus to
$1,400 for a large (five library print subscription) campus. These rates would be the total revenue required by the association for campus subscriptions, assuming that the library's print subscriptions are abandoned. A database distributor would add some markup.
The campus intranet rate for electronic access is easily differentiated from the print library subscription because it provides a license for anyone on the campus intranet to use the journals in full electronic format. This rate could be established as a price for a new product, allowing the print subscriptions to continue at library rates. Transition from print to electronic distribution could occur gradually with the pace of change set by libraries. Libraries would be free to make separate decisions about adding the campus intranet service and, later, dropping the print subscription.
Individual association members could continue their print subscriptions as long as they wish, reflecting their own tastes for the print product and the quality of service of the electronic one as delivered. Indeed, individual members might get passwords for direct access to the on-line journals. Some members may not be affiliated with institutions that subscribe to network licenses.
It is possible that the campus intranet license will be purchased by campuses that have not previously subscribed to the AEA's journals. If the institution's cost of participating in network delivery is much less than the cost entailed in sustaining the print subscription-for example, the avoidance of added shelf space as will be discussed below-then more campuses might sign on. This effect may be small for the AEA because it is the premier publisher in economics, but might be significant for other journal publishers.
Pay-Per-Look The AEA has had minimal revenues from reprints and royalties on copies. Indeed, it pioneered in guaranteeing in each issue of its journals a limited right to copy for academic purposes without charge. The association adopted the view that the cost of processing the requests to make copies for class purposes (which it routinely granted without charge) was not worth incurring. By publishing a limited, no-charge right to copy, it saved itself the cost of managing the granting of permissions and saved campuses the cost of seeking them.
With electronic distribution, the campus intranet license will automatically grant permission for the journals to be used in course reserves and in print-on-demand services for classes.
On campuses with too little commitment to instruction in economics to justify a library subscription or a campus intranet license, there may still be occasional interest in use of journal articles. There may be law firms, businesses, consulting enterprises, and public interest groups who occasionally seek information and would value the intensity of exploration found in academic journals. With the ubiquitous Internet, they should be able to search a database on-line for a modest usage fee, identify articles of interest, and then call up such articles in full-image format on a pay-per-look basis. Suppose the Internet reaches a million people who are either
on campuses without print library subscriptions today or are not on campuses at all but who would have interest in some occasional use of the academic material. This market represents a new potential source of revenue for the AEA that could be reached by an Internet-based pay-per-look price.
What rate should the association set per page to serve the pay-per-look market without unduly cannibalizing the sale of campus intranet licenses? Let's take a one print library subscription campus rate at $280 per year for access to about 3,500 published pages of journal articles (leaving aside the index and abstracts). One look at each published article page per year at $.08 per page would equal the $280 license. A campus that had a distribution of users that averaged one look at each page would break even with the campus intranet license with a pay-per-look rate of $.08 per page. This rate is the rate of net revenue to the association; the database distributor may add a markup. For discussion, suppose the database distributor's markup is 100%. If the Internet users beyond the campus intranet licenses looked at 2 million pages per year at $.16 per page including fees to the Internet service provider, the association would recoup nearly a quarter of its lost membership revenue from the intranet licenses from this source.
A critical issue for the emergence of a pay-per-look market is the ability to account for and collect the charges with a low cost per transaction. If accounting and billing costs $10 per hit with hits averaging 20 pages, then the charge might be $14 per hit ($10 to the agent, $4 to the AEA). Such a rate compares well with the $3o-per-exchange cost incurred in conventional interlibrary loan. Yet such high transaction costs will surely limit the pay-per-look market.
A number of enterprises are offering or plan to offer electronic payment mechanisms on the Internet. In the library world, RLG's WebDOC system may have some of the necessary features. These systems depend on users being registered in advance with the Web bank. As registered users, they have accounts and encrypted "keys" that electronically establish their identity to a computer on the Net. To make a transaction, users need only identify themselves to the electronic database vendor's computer using the "key" for authentication. The vendor's computer checks the authentication and debits the readers' account at the Web bank. In this fashion, secure transactions may occur over the network without human intervention at costs of a few cents per hit. If such Web banks become a general feature of the Internet, Web money will be used for a variety of purposes. The incremental cost of using Web banks for access to information should be modest and should allow the pay-per-look market to gain in importance. Markups per transaction might then be quite modest, with gross charges per page in the vicinity of $.10 to $.20. This rate compares with the $.04-per-hit cost of the Britannica mentioned in the opening sentence of this essay.
The core idea here is that individual readers make the decisions about when to look at a document under a pay-per-look regime. The reader must face a budget constraint, that is, have a limited set of funds for use in buying information products or other services. The fund might be subsidized by the reader's institution, but
the core choices about when to pay and look are made individually. When the core decision is made by the reader with limited funds, then the price elasticity of demand for such services may be high. With a highly elastic demand, even for-profit publishers will find that low prices dominate.
Current article fulfillment rates of $10 to $20 could fall greatly. The MIT Press offers to deliver individual articles from its electronic journals for $12. EI Village delivers reprints of articles by fax or other electronic means for fees in this range.
Enhanced Member Services A third strategy for responding to the possible revenue shortfall from the loss of memberships at the AEA would be to enhance membership services. One approach, proposed by Hal Varian, would be to offer superior access to the electronic journals to members only. The electronic database of journal articles might be easily adapted to provide a personal notification to each member as articles of interest are posted. The association's database service for members might then have individual passwords for members and store profiles of member interests so as to send e-mail notices of appropriate new postings. The members' database might also contain ancillary materials, appendices to the published articles with detailed derivations of mathematical results offered in software code (for example, as Mathematica notebooks), copies of the numerical data sets used in empirical estimation, or extended bibliographies. The members' database might support monitored discussions of the published essays, allowing members to post questions and comments and allowing an opportunity for authors to respond if they wish. These enhancements generally take advantage of the personal relationship a member may want to have with the published literature, a service not necessarily practical or appropriate for libraries.
Indeed, one divide in the effort to distinguish member from library access to the journal database is whether the enhancement would have value to libraries if offered. Libraries will be asked to pay a premium price for a campus intranet license. They serve many students and faculty who are not currently members of the AEA and who are unlikely to become members in any event, for example, faculty from disciplines other than economics. Deliberately crippling the library version of the electronic journals by offering lower resolution pages, limited searching strategies, a delay in access, or only a subset of the content will be undesirable for libraries and inconsistent with the association's goal of promoting discussion of economics. However, there may be some demand for lower quality access at reduced prices. The important point is that for membership to be sustained, it must carry worthwhile value when compared to the service provided by the campus license.
Another approach is simply to develop new products that will have a higher appeal to members than to libraries. Such products could be included in the membership fee, but offered to libraries at an added extra cost. One such product would be systematic access to working papers in economics. Indexes, abstracts, and in some cases, the full text of working papers are available without charge at
some sites on the World Wide Web today. The association might ally itself with one of these sites, give the service an official status, and invest in the features of the working paper service to make it more robust and useful. Although freebie working paper services are useful, an enhanced working paper service for a fee (or as part of membership) might be much better.
To the extent that enhanced services can sustain memberships in the face of readily available campus intranet access to journals, the premium for campus intranet access could be lower.
The AEA might offer a discount membership rate to those who opt to use the on-line version of the journals in lieu of receiving print copies. Such a discounted rate would reflect not only the association's cost saving with reduced print distribution but also the diminished value of membership given the increased prospect of campus intranet licenses.
To the extent that the pay-per-look market generates new revenue, then the campus intranet rate could also be less. The total of the association's revenues need only cover its fixed and variable costs. (The variable cost may approach zero with electronic distribution.) If membership revenues dropped by two-thirds and pay-per-look generated one-quarter of the gap, then the premium rate for the campus intranet license need be only one-third to one-half above current rates, say, $200 for a one library print subscription campus to $1,000 for a five library print subscription campus (net revenue to the association after the net distributor's markup).
At the other end of the publishing spectrum from the AEA are those publishers who produce low-volume publications. Some titles have few personal subscriptions and depend primarily on library subscriptions that are already at premium rates. For these titles, replacing the print subscription with an intranet license will simply lower costs. The Johns Hopkins University Press offers its journals electronically at a discount in substitution for the print.
Some titles may have mostly personal subscriptions with no library rate, including popular magazines like the Economist. Such publications might simply be offered as personal subscriptions on the Internet with an individual password for each subscriber. The distribution by network would lower distribution costs and so ought to cause the profit-maximizing publisher to offer network access to individuals at a discount from the print subscription rate. Such a publication may not be available by campus intranet license.
The Journal of Statistics Education (JSE) is distributed via the Internet without charge. It began with an NSF/FIPSE grant to the North Carolina State University in 1993. The JSE receives about 40 manuscripts per year and, after a peer review, publishes about 20 of them. The published essays are posted on a Web site and a table of contents and brief summaries are dispatched by e-mail to a list of
about 2,000 interested persons. JSE's costs amount to about $25,000 per year to sustain the clerical work necessary to receive manuscripts, dispatch them to suitable referees, receive referee reports, and return them to the author with the editor's judgment. The JSE also requires a part-time system support person to maintain the server that houses the journal. The JSE has not charged for subscriptions, receives no continuing revenue, and needs about $50,000 per year to survive. Merger with a publisher of other statistics journals may make sense, allowing the JSE to be bundled in a larger member service package. Alternatively, it might begin to charge a subscription fee for individuals and a campus license rate for libraries. Making the transformation from a no-fee to a fee-based publication may prove difficult. A critical issue is how much fixed cost is necessary to maintain reasonable production values in a low-volume publication. At present, JSE is seeking a continuing source of finance.
In general, a publisher will consider three potential markets: (1) the campus intranet license/library sale, (2) the individual subscription, and (3) the pay-per-look/individual article sale. These three markets might be served by one title with shared fixed costs. The issue of whether to offer the title in each market and at what price will reflect the incremental cost of making the title available in that market, the elasticity of demand in each market, and the cross price elasticities between markets. For example, the price of the campus license will have an effect on individual subscription sales and vice versa, and the price of the individual subscriptions will have an effect on the sale of individual articles and vice versa. The more elastic the demands, the lower the prices, even for for-profit publishers. With higher substitution between the three forms, the closer the prices will be across the three forms.
Economies of Scope
To this point, the analysis applies essentially to one journal at a time, as though the journal were the only size package that counted. In fact, of course, the choice of size of package for information could change. Two centuries ago, the book was the package of choice. Authors generally wrote books. Libraries bought books. Readers read books. In the past 50 years, the size of package shifted to the journal in most disciplines. Authors write smaller packages, that is, articles, and get their work to market more quickly in journals. The elemental information product has become more granular. Libraries commit to journals and so receive information faster and at lower cost per unit. In deciding what to read, readers depend on the editors' judgment in publishing articles. In short, libraries buy bigger packages, the journals, while authors and readers work with smaller units, the articles.
With electronic distribution, the library will prefer to buy a still larger package, a database of many journals. A single, large transaction is much less expensive for a library to handle than are multiple, small transactions. Managing many journal titles individually is expensive. Similarly, readers may prefer access to packages
smaller than journal articles. They are often satisfied with abstracts. The electronic encyclopedia is attractive because it allows one to zip directly to a short, focused package of information with links to more. Authors, then, will be drawn to package their products in small bundles embedded in a large database with links to other elements of the database with related information. Information will be come still more granular.
If the database becomes the dominant unit of trade in academic information, then publishers with better databases may thrive. The JSTOR enterprise appears to have recognized the economies of scope in building a database with a large quantity of related journal titles. JSTOR is a venture spawned by the Mellon Foundation to store archival copies of the full historic backfiles of journals and make them available by network. The core motive is to save libraries the cost of storing old journals. JSTOR plans to offer 100 journal titles within a few years. Some of the professional societies, for example, psychology and chemistry, exploit economies of scope in the print arena by offering dozens of journal titles in their disciplines. Elsevier's dominance in a number of fields is based in part on the exploitation of scope with many titles in related subdisciplines. The emergence of economies of scope in the electronic arena is illustrated by Academic Press's offer to libraries in Ohio LINK. For 10% more than the cost of the print subscriptions the library had held, it could buy electronic access to the full suite of Academic Press journals electronically on Ohio LINK.
To take advantage of the economies of scope, the electronic journal might begin to include hot links to other materials in the database. The electronic product would then deliver more than the print version. Links to other Web sites is one of the attractive features of the Web version of the Encyclopedia Britannica. An academic journal database could invite authors to include the electronic addresses of references and links to ancillary files. Higher quality databases will have more such links.
The American Economic Association eschews scope in the print arena, preferring instead to let a hundred flowers bloom and to rely on competition to limit prices. Its collection of three journals does not constitute a critical mass of journal articles for an economics database, and so it must depend on integration with other economics journals at the database level. The Johns Hopkins University Press's MUSE enterprise suffers similar lack of scope. Although it has 45 journal titles, they are scattered among many disciplines and do not, collectively, reach critical mass in any field.
The emergence of more powerful, network-based working paper services seems likely to lower the cost of the editorial process, as mentioned above. A common, well-managed electronic working paper service might make the cost of adding a journal title much lower than starting a title from scratch without access to electronic working papers. The enterprise that controls a capable working paper service may well control a significant part of the discipline and reap many of the advantages of scope in academic publishing.
In fact, a capable electronic working paper service could support multiple editors of a common literature. One editor might encourage an author to develop a work for a very sophisticated audience and publish the resulting work in a top academic journal. Another editor might invite the author to develop the same ideas in a less technical form for a wider audience. Both essays might appear in a common database of articles and link to longer versions of the work, numerical data sets, bibliographies, and other related material. The published essays will then be front ends to a deeper literature available on the Net.
In addition to limiting the number of journals it produces, the American Economic Association differs from many publishers by emphasizing low cost. The price of its journals is less than half the industry average for economics journals, and the differential between library and individual rates is low. If the AEA's goal were to maximize profit, it could charge authors more, charge members and libraries more, make more revenue from its meetings, and launch more products to take advantage of its reputation by extending its scope. The rents available in this marketplace are then left to the authors, members, libraries, and competing publishers. The AEA is not maximizing its institutional rents.
Other nonprofit publishers may seek higher revenues to capture more of the available rents and use the proceeds to generate more products and association services. Lobbying activities, professional certification and accreditation, more meetings, and more journals are common among professional societies.
Many for-profit publishers seek to maximize the rents they can extract from the marketplace for the benefit of their shareholders. In considering how to package and price electronic products, the for-profit publishers will continue to be concerned with finding and exploiting the available rents. The profit-maximizing price for a journal is determined by the price elasticity of demand for the title and the marginal cost of producing it. With convenient network access, there may be an increase in demand that would allow a higher price, other things being equal. How the price elasticity of demand might change with network access is unknown. The fall in marginal cost with electronic distribution need not lead to a lower price.
One might then ask how a shift to electronic publishing may affect the size of the rents and their distribution. A shift to the database as the optimal size package with falling marginal costs would seem both to increase the size of potential rents and to make easier their exploitation for profit. Suppose control of a powerful working paper service gives a significant cost advantage to journal publishers. Suppose further that academic institutions find major advantages in subscribing to large databases of information rather than making decisions about individual journal titles. The enterprise that controls the working paper service and the database of journals may then have considerable rent-capturing ability. The price elas-
ticities of demand for such large packages may be low and the substitutes poor, and so the markups over costs may be substantial. The possibility of a significant pay-per-look market with high price elasticity of demand might cause the profit-maximizing price to be lower. The possibility of self-publication at personal or small-scale Web sites offers a poor substitute to integration in a database because Web search engines are unlike to point to those sites appropriately.