Economics of Scholarly Communication John Houghton Centre for Strategic Economic Studies Victoria University

Background  CISC Discussion Paper on the Economics of Scholarly Communication:  primarily about how the system works now  less on the impact of ‘digital delivery’  National Innovation System:  focus is on knowledge production power  knowledge distribution power neglected Centre for Strategic Economic Studies

Context of the ‘Crisis’  Crisis in scholarly communication:  technological change (the ICT revolution)  system dysfunction (incentives to produce)  Dynamics of context:  funding pressures & accountability  increased publication incentives & output  ICT revolution - transforming production, consumption & distribution  price increases & decline of Australian dollar Centre for Strategic Economic Studies

Prices to Australian Research Libraries (Per Cent Change Indexed to 1986) Centre for Strategic Economic Studies

Australian - US Dollar Exchange (Annual Average Exchange Rates) Centre for Strategic Economic Studies

Median Prices to Australian Research Libraries, (Per Cent Change) Centre for Strategic Economic Studies

Product System Approach A systems approach focusing on the linkages between actors in a complex system that affects the transformation of activities and materials into goods and services through the processes of creation, production and distribution Centre for Strategic Economic Studies

Scholarly Communication Product System Centre for Strategic Economic Studies REGULATORY FRAMEWORK ACTIVITIES: Intellectual property, content, communications and professional regulation ACTORS: Governments, regulators, copyright agencies, industry & professional associations COLLECTIVE SUPPORT INFRASTRUCTURE ACTIVITIES: Research & Education funding, Physical infrastructure, & Skills ACTORS: Governments, Funding & Collection Agencies, & Education Institutions SUPPLY NETWORK ACTIVITIES: Authoring & Editing, Materials supply, Network provision ACTORS: Authors & Editors, Material & Equipment suppliers PUBLISHERS ACTIVITIES: Editing/Selecting, Printing/Preparation, Marketing, Distribution ACTORS: Publishers (commercial, institutional & membership-based) ACTIVITIES: Purchasing/Accession, Making available ACTORS: Wholesale & Retail, Distributors, Consolidators, Research Libraries, Individual purchasers & subscribers DISTRIBUTION

Centre for Strategic Economic Studies Scale of Activities in Australia REGULATORY FRAMEWORK COLLECTIVE SUPPORT INFRASTRUCTURE ACTIVITIES: Higher education $8.2 bn pa, R&D (GERD) $8.7 bn pa INFRASTRUCTURE: R&D physical ~$1 bn pa, Network ~$1 bn pa SUPPLY NETWORK CREATORS : Up to 200,000 people, $10 bn expenditure, 25,000 papers, ~500 serials titles ~5,000 books SUPPLIERS: Up to 73,500 people, $12.5 bn turnover PUBLISHERS PUBLISHING: Up to 12,000 people, $2.4 bn turnover TRADE: Exports $135 m Imports $795 m Online & mail ? LIBRARIES: 10,000 plus libraries, ~50 academic/research Scholarly content: - Serials $94 m pa - Books $44 m pa THE CHANNEL: Wholesale $2.5 bn Retail up to $4 bn DISTRIBUTION

Economics of Information  Information is the product of the codification of knowledge:  Knowledge is a public good, but information is not  Information is non-rivalrous in consumption:  Social returns are maximised through expansion of access and dissemination  Information is an experience good:  Value in authorship & branding, as well as content Centre for Strategic Economic Studies

Economics of Content Creation (1)  Institutional incentives:  promotion, tenure & funding linked to publication  encouraging more output/content  multiplying titles & reducing circulation  raising aggregate fixed costs  Payments by authors (submission/publication fees):  disincentive to publish, leading to reduced dissemination  publication by means not merit  high transaction costs  would cost savings be passed on?  incentive for publishers to lower the bar of scholarship Centre for Strategic Economic Studies

Economics of Content Creation (2)  Payments to authors (pay for content):  demand & supply would keep payments low  high transaction costs  who should receive payments?  barrier to entry and divisive, and  simply raises costs  Non-cooperation:  retaining IP  discount on share of production?  shift of activity to low cost producer  multiple publication would aggravate the problem Centre for Strategic Economic Studies

Economics of Content Creation (3)  Pre-print servers & internet publication:  opportunity costs in consumption  value in selection & filtering (ie. peer review)  dangers in alternative article filtering strategies  differences between humanities and natural sciences  pre-print servers less likely to work in humanities  dangers where authors and readers are not the same  dangers in applied fields (eg. medicine & engineering) Centre for Strategic Economic Studies

Economics of Production  Increasing returns and concentration  Knowledge economy will create a proliferation of materials, firms and activities  Ease of access via internet will drive down rents at the delivery level  Rents will migrate up the value chain to those with genuinely scarce factors & competitive advantages  Publishers will face competition from a wider range of players, and new players will emerge Centre for Strategic Economic Studies

Journal Production Costs and Savings  Journal production costs (King & Tenopir):  High first-copy costs, low marginal costs  High article processing costs (45% of total)  High marketing & administration costs (28% of total)  High support costs (26% of total)  Distribution costs minimal  Impacts of digital delivery:  Publisher cost savings are in processing & support, not distribution  Major opportunities for value adding Centre for Strategic Economic Studies

Publisher Business Models Centre for Strategic Economic Studies Bundling and subscription:  secure payments in advance  perpetuate marginal titles  increase number of titles on markets  increase aggregate fixed costs  reduce divisability and substituteability  price at average willingness to pay  maximise revenue

Operating Margins of Selected Companies circa 1998 (Per Cent) Centre for Strategic Economic Studies

Economics of Distribution  Must consider whole of system costs  Purchasing practices reinforce publishers business models:  titles compete with each other as substitutes across broad fields  budgets for each field have been determined by strategic priorities of the institution, independent of price, demand or usage information  budget allocations to each field have taken little account of price per use within those fields  price signals have rarely reached consumers Centre for Strategic Economic Studies

A Feedback Loop Centre for Strategic Economic Studies Authors seek publication outlets & publishers seek to build their lists New titles emerge, increasing aggregate fixed costs Circulation of each title declines, further increasing aggregate fixed costs Unit prices increase to cover fixed costs Publisher portfolios grow, increasing their market power

Ways Ahead?  Reduce costs or change what the market will bear?  Market conforming:  transmit price signals to consumers  create an effective structure of incentives  trial alternative mechanisms  encourage new entrants (but beware of fixed costs)  Market distorting:  national site license  consortial purchasing Centre for Strategic Economic Studies

Scholarly Communication in Transition  Fundamental transition from print to digital delivery  Actors in scholarly communication system must:  develop new skills and organisational competencies  develop new business models  develop new systems and infrastructures  Enormous promise of digital delivery, but there are significant transitional costs Centre for Strategic Economic Studies

Options for the Future  Consortial purchasing & National Site License  ‘E-issues’, infrastructure & organisational change  Economic priorities:  reforming the structure of incentives facing authors  improving the transmission of market signals  devolution and flexibility in university/library budgets  use the bit trail to improve feedback  study of the publishing industry  Learn from other industries (eg. Telecoms)  Study how research & education are changing - ie. know your customer Centre for Strategic Economic Studies

Economics of Scholarly Communication John Houghton Centre for Strategic Economic Studies Victoria University