A Bernstein Research senior investment analyst in London, Claudio Aspesi, wagered on the basis of his early prediction that the most influential firm in the publishing industry, among the most lucrative sectors worldwide at the time, would soon crash. The multinational publishing mogul, Reed-Elsevier, saw revenues upwards of £6 billion, and investors all found it delightfully profitable to pour money into it. Reed-Elsevier was, in fact, one of very few publishers that navigated the transition to the digital age quite flawlessly, and they only forecasted continued growth. In lieu of this, Aspesi saw what no other financial analyst could see, which was that the prediction wouldn’t hold its own weight.
Stephen Buranyi, a British former immunology researcher at the Imperial College in London, recounts Reed-Elsevier’s status at the time as bearing little to no indication of tanking anytime in the future. “The core of Elsevier’s operation is in scientific journals, the weekly or monthly publications in which scientists share their results. Despite the narrow audience, scientific publishing is a remarkably big business,” Buranyi says. “With total global revenues of more than £19 billion, it weighs in somewhere between the recording and the film industries in size, but it is far more profitable. In 2010, Elsevier’s scientific publishing arm reported profits of £724 million on just over £2 billion in revenue. It was a 36% margin—higher than Apple, Google, or Amazon posted that year.
But Elsevier’s business model seemed a truly puzzling thing. In order to make money, a traditional publisher—say, a magazine—first has to cover a multitude of costs: it pays writers for the articles; it employs editors to commission, shape and check the articles; and it pays to distribute the finished product to subscribers and retailers. All of this is expensive, and successful magazines typically make profits of around 12-15%.”
This exemplifies the anomalous gains of Reed-Elsevier that Aspesi observed. The revenue generated from scientific articles is generated in an almost identical process to that of the magazine example Buranyi provides, except for many of the actual costs not actually being shouldered by the publisher. Scientists direct their own work and are funded predominately through government funding, and because the value in their research is its proliferation and the public’s exposure to it, they give their finished products to scientific publishers for free.
The publisher simply compensates the editors for determining whether the content is worthy of publication and whether it is written with the requisite technical proficiency. Even these editors, though, do not shoulder the bulk of the load in the editorial process, though, because the researchers themselves are the ones who verify the scientific validity of each other’s works and evaluate their respective experiments, which is why their articles are called peer-reviewed articles. Researchers voluntarily do this to keep abreast of the latest advancements in research in their own fields as well as to fulfill university faculty obligations.
Publishers usually sell the product back to the libraries of universities and institutions that receive government funding to fuel all this research, and scientists, who collectively created the product originally anyway, read each other’s works. This is why the scientific publishers avoid so much of the cost for their product. Buranyi says that “It is as if the New Yorker or the Economist demanded that journalists write and edit each other’s work for free, and asked the government to foot the bill.
“Outside observers tend to fall into a sort of stunned disbelief when describing this setup. A 2004 parliamentary science and technology committee report on the industry drily observed that ‘in a traditional market suppliers are paid for the goods they provide’. A 2005 Deutsche Bank report referred to it as a ‘bizarre’ ‘triple-pay’ system, in which ‘the state funds most research, pays the salaries of most of those checking the quality of research, and then buys most of the published product’.”
Aspesi talked to over 25 prominent researchers and activists, and he concluded that the paradigm was about to shift. An increasing number of libraries, the main buyers of journals for universities, were beginning to say that their budgets were being stretched thin for decades due to rate hikes, so they were threatening Elsevier with the cancellation of their multi-million-pound subscription packages unless the rates dropped considerably. The German Research Foundation (DFG) and the American National Institutes of Health (NIH), among other state organizations, had just made the commitments to publishing research in online journals, so Aspesi figured governments would intervene to make sure funded research would be free and public for everybody.
Aspesi published a report in March 2011 suggesting that clients sell Elsevier stock on the basis of that logic. Within months, he pushed the Elsevier CEO, Erik Engstrom, during a conference call with investment firms and Elsevier management to talk about the breakdown of the relationship between the publisher and the libraries. Engstrom evaded Aspesi’s questions, and the next two weeks saw Elsevier’s stock shrink by 20 percent, devaluing by £1 billion.
Buranyi says, though, that “no one was more transformative and ingenious than Robert Maxwell, who turned scientific journals into a spectacular money-making machine that bankrolled his rise in British society. Maxwell would go on to become an MP, a press baron who challenged Rupert Murdoch, and one of the most notorious figures in British life. But his true importance was far larger than most of us realise. Improbable as it might sound, few people in the last century have done more to shape the way science is conducted today than Maxwell.”
Albert Henderson, Pergamon’s former deputy director, said of Maxwell, “He always said we don’t compete on sales, we compete on authors.” Henderson spoke of Maxwell’s philosophy saying, “We would attend conferences specifically looking to recruit editors for new journals.” He wined and dined the researchers themselves with Concorde flights, parties atop Athens Hilton Hotel and boat tours in the Greek islands on which researchers could take the time to plan their next research venture. As a PR trick of sorts, Maxwell insisted on grand titles that involved something like “International Journal of…” and other such prefixes.
Peter Ashby, Pergamon’s former vice president, says, “He had interests in all of these places. I went to Japan, he had an American man running an office there by himself. I went to India, there was someone there.” International markets were incredibly lucrative, and Maxwell cornered them before anyone knew to try. Today, the scientific article is the driving force of the scientific community because his model, based on his insight into the economy of scientific journals.