Publisher Revenue
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.[15]
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
Figure 6.2.
American Economic Association Revenues 1995
Source: Elton Hinshaw, "Treasurer's Report," American Economic
Review, May 1996, and unpublished reports.
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.[16] 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.[17] 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.[18] 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.[19] 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.[20] 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.[21]
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).