Publisher Costs
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.[10] 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.[11] 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.[12] However, the editorial cost
Figure 6.1.
American Economic Association Expenses 1995
Source: Elton Hinshaw, "Treasurer's Report," American Economic Review,
May 1996, and unpublished reports.
Note: Percentages do not sum to 100% due to rounding.
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.[13] 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%.[14]