Turning the Supertanker: Deutsche Bank on Elsevier's excess
In 2005, Deutsche Bank published an investment advisory report about Reed Elsevier (REL), titled “Turning the Supertanker”. This report and its undelrying research captured the inequity of the company’s high margins in exchange for little value, particularly in its science publishing division.
Some of the report’s trenchant assessments have been quoted repeatedly in the years since, but the advisory itself (a 75-page document that anyone can get a copy of on request) has been quite hard to find online.
Quotes below (emphasis added) highlight their assessment of Elsevier’s Science division, which they characterize as adding little value, taking advantage of a bizarre market, and charging excessive amounts.
Unjustifiable margins : ‘triple-pay’ and low value
[M]argins in the journals business [are] ‘extremely high’. One could argue that they are unjustifiably high - bluntly, we believe that the professional publishers add little value to the research process. We suggest that readers consider the margins (just momentarily) as taxpayers rather than investors. How happy are you, as taxpayers, that your governments are enabling private sector operators, with very little inveted capital, to earn 40% operating margins? (p34)
What the Open Access debate has done… is to refocus attention on the large margins made by commercial publishers, including REL, in the journals market. The industry structure can only be dsecribed as bizarre - the state funds most research, pays the salaries of most of those checking the quality of research (in peer review processes), an then buys most of the published product. This has been rather elegantly described as the “triple-pay” model.
We believe the publisher adds relatively little value to the publishing process. We are not attempting to dismiss what 7,000 people at REP do for a living. We are simply observing that if the process really were as complex, costly and value-added as the publishers protest that it is, 40% margins wouldn’t be available. We can go further and examine the size of margins relative to the invested capital... (p36, diagram p37)
the excessive level of margins in the industry has attracted the attention of politicians and regulators in a number of countries. (p38)
On related businesses, and negative working capital
Strategically we doubt whether it would be wise for journal buyers and rival publishers to allow REL to become dominant in the secondary information market. (p34)
[Health Science books:] In essence the issue is that content in this space is inherently somewhat less proprietary than that in the journals space since the underlying ontnet is by definition largely in the public domain. (p35)
part of the point around the Open Access debate is that the commercial publishers have been ‘grandfathered’ with intellectual property rights that more properly belong to the public. So from a public policy stance we could think instead about the ongoing capital requirement of the business. We know that the working capital requirement of the journals business is minimal (or in fact negative). (p37)
On the importance of the journals business overall
the importance [to REL] of the health of, and of prospects for, the journals operation cannot be overstated (p35)
Given the relative strength of REL’s journal titles it has in truth been only marginally affected by its customers’ budgetary problems. (p36)