Should University Presses Adopt An Open Access [Electronic Publishing] Business Model For All Of

Their Scholarly Books?

Albert N. Greco Professor of Marketing

Fordham Universityagreco@fordham.edu

Robert M. Wharton Professor of Management Systems

Fordham University

University of TorontoJune 26, 2008

Abstract

This paper analyzes U.S. university press datasets (2001-2007) todetermine net publishers’ revenues and units, the major channelsof distribution (libraries and institutions; college adoptions; andgeneral retailer sales) that these presses relied on, and the intensecompetition these presses confronted from commercial scholarly,trade, college textbook publishers, and trade book publishers.

ARIMA forecasts were employed to determine projections for theyears 2008-2012 to ascertain changes in market shares.

The paper concludes with a series of suggestions including the idea thatuniversity presses should consider abandoning a “print only” businessmodel and adopt an “Open Access-Print On Demand” [POD] businessmodel in order to reposition the presses to regain the unique valueproposition these presses had in the late 1970s.

Introduction

Since the late 19th Century, U.S. based university presses played apivotal role in the transmission of scholarly knowledge andbecame the “gold standard” in the hiring, tenure, promotion, andmerit pay processes (especially in the humanities and the socialsciences).

By 2008 these (approximately) 95 U.S. based presses variedsignificantly in size:• Exceptionally large presses (+$50 million): e.g., Oxford;

Cambridge• Large presses (+$6 million): e.g., Chicago• Medium sized presses (+$1.5-3.0 million): e.g., Notre Dame• Small presses (under $1.5 million): e.g., Carnegie-Mellon

The “Traditional” University Press Business Model: A Unique Value Proposition

Between 1945 and the late 1970s, the University press world was a“cozy” environment where important academics knew the key university press editors and publishers; and they sent theseeditors their important manuscripts (and encouraging their bestgrad students to do likewise.

The end result:• Presses published superb books• Dominated scholarly publishing in the U.S.• Had “preeminent” sales in library (averaged about 1,500 copies to

libraries) and grad student sales channels

Net revenues:• 1972: $41.4 million• 1977: $56.1 million

Suggested retail prices in 1970s: $10-$15 dollars.

Basic Business Model: University Press Subsidies 2001-2006

Direct financial grant 70.69%

Free university support services:• Payroll and human services 86.21%• Legal services 84.48%• Audit services 70.70%• Office space 62.07%• Accounting services 60.34%• Working capital 44.83%• Employee benefits 39.66%• Salaries 37.93%• Insurance 36.21%• Carrying accounts receivables 34.48%• Carrying costs of inventory 29.31%• Parking 17.24%• Work studies/interns N/A

Source: AAUP

University Presses Confront Change: 2001-2007

Because of a series of unanticipated changes (called a“Black Swan” in the published literature), the“insulated” university press world changed after 2001.

We have reliable data for the years 1980-2000.

However, because of space and time constraints, wewill analyze the years 2001-2007 with ARIMAprojections for 2008-2012. Please see the completepaper for a list of the published literature utilized in thispaper.

Change #1: New Book Title Output

Total New Annual Total U.S. Annual Total New Annual

University Percent Book Percent Prof. & Sch. Percent

Presses Change Publishers Change Publishers Change

2001 10,130 -- N/A -- 41,016 --2002 9,915 - 2.12 247,777 -- 43,554 6.192003 11,104 11.99 266,322 7.48 47,662 9.432004 9,854 -11.29 295,523 10.96 44,981 -5.632005 9,812 - 0.43 282,500 - 4.14 42,975 -4.462006 9,969 1.60 291,922 3.34 47,124 9.652007 10,781 8.15 411,422 40.94 48,951 3.88

Total 71,565 -- 1,795,466 -- 276,263 --2002-2007

Source: R.R. Bowker

Change #2: Decline in University Press Unit Sales

Units (Millions) % Change2001 24.6 million --2002 24.7 2.922003 24.6 - 0.402004 31.4 27.642005 31.4 02006 29.0 -7.642007 28.7 -1.032008 28.4 -1.052009 28.2 -0.702010 27.9 -1.062011 27.7 -0.712012 27.5 -0.70

Source: Greco & Wharton, ARIMA Forecast for 2008-2012.

Change #3: University Press Sales by Channels of Distribution (Millions of Dollars)

General College Libraries &Retailers Adoptions Institutions

2001 109.9 114.8 125.62002 112.3 117.3 129.62003 114.3 119.5 131.52004 108.9 121.3 132.32005 111.5 124.3 135.92006 115.2 128.4 140.52007 118.4 131.9 145.72008 122.1 136.0 149.72009 125.8 140.1 153.92010 129.5 144.3 158.22011 133.2 148.4 162.42012 146.0 152.5 166.6

Source: Greco & Wharton, ARIMA Forecasts 2008-2012

Change #3: University Press Unit Sales by Channels of Distribution (Millions of Units)

General College Libraries &Retailers Adoptions Institutions

2001 8.3 7.4 3.92002 8.1 7.2 4.02003 8.1 7.2 4.02004 9.9 9.6 4.82005 9.9 9.4 4.92006 9.2 8.7 4.62007 8.8 8.4 4.62008 8.8 8.3 4.62009 8.8 8.3 4.52010 8.9 8.3 4.42011 8.8 8.3 4.32012 9.3 8.4 4.3

Source: Greco & Wharton, ARIMA forecasts 2008-2012

Change #4: Competition from Professional and Scholarly Publishers and College Textbook Publishers

($ Million; Millions of Units)Professional Publishers College Textbook PublishersRevenues Units Revenues Units

2001 4,739.1 168.6 3,468.9 66.82002 4,940.0 170.3 3,718.5 68.42003 5,093.1 172.1 3,860.1 69.22004 5,312.1 175.9 3,899.1 68.02005 5,497.2 177.9 3,976.3 67.62006 5,672.7 180.4 4,095.6 67.62007 5,904.8 183.5 4,239.0 68.22008 6,170.3 185.9 4,387.3 68.82009 6,312.9 187.3 4,540.9 69.42010 6,464.6 188.2 4,695.3 69.92011 6,642.2 190.6 4,850.2 70.42012 6,833.4 192.6 5,010.3 71.0

Source: Greco & Wharton

Commercial Professional and Scholarly Publishers

These publishers were active in scholarly journal publishing andscholarly book publishing (print and digital sales/site licenses);and they were able to develop policies and procedures tomonetize their digital product lines.

• Reed Elsevier• Wolters Kluwer• Sage• Wiley-Blackwell• Springer• Informa• Pearson PLC (Prentice-Hall)• McGraw-Hill

Results of Competition Between University Presses, Professional & Scholarly Publishers, and College

Textbook Publishers: 2001-2012

General Retailers• University Presses +7.73%• Prof. & Schol. Pubs. +18.1%• College Textbook Pubs. +17.65%

College Adoptions• University Presses +14.9%• Prof. & Schol. Pubs +17.21%• College Textbook Pubs +17.65%

Libraries & Institutions• University Presses +16.0%• Prof. & Schol. Pubs +17.55%• College Textbook Pubs +15.77%

Additional Market Changes

The “Serials Crisis”• Increases in serials costs

The decline in the number of independent bookstores• 1970s: 4,400• 2007: 1,800

Emergence of mass merchants, price clubs, and other retailers asimportant channels of distribution

Decline in media usage (hours per person per year)

Emergence of “disruptive technologies”• POD• Open Access• The Internet

“Wall Street”* Enters the Book Industry

“Wall Street” firms (i.e., hedge funds, private equity firms, andinvestment banks) entered the book industry investing in:• Commercial Professional and Scholarly Publishing Firms• College Textbook Publishing Firms

These firms included:• Thomas S. Lee• Bain• JP Morgan• Goldman Sachs• Pershing• Blackrock• Morgan Stanley

*The term “Wall Street” refers to financial service firms in New York,London, Paris, etc.

Competition from Trade Book Publishers

The largest U.S. trade book publishing firms became major competitors,attracting leading scholars with advances and major marketingCampaigns (ads in The Chronicle of Higher Education,presentations at Book Expo America, Book Expo Canada, etc.)

• Random House• Penguin• HarperCollins• Simon & Schuster• Hachette• Holtzbrinck (St. Martin’s Press, Farrar Strauss Giroux)

“Wall Street” firms also invested in some of these companies aswell as in book retailers (e.g., Barnes & Noble; Borders; Books-A-Million).

“Wall Street’s” Investment Strategy

These firms realized that the economics of publishing were harshand unforgiving; but they were understandable andquantifiable.

This meant they could develop sophisticated statistical models topredict future sales and earnings.

Many publishing firms have low “betas” (a measure of stock pricerisk and volatility) and high “alphas” (managers able to makemoney); for example:• Pearson PLC 0.95• Reed Elsevier 0.65• McGraw-Hill 1.24• John Wiley 1.57

Impact on University Presses

Starting around 1980, the majority of all university presses

witnessed a sophisticated pincer movement by commercial

professional and scholarly presses, college textbook

publishers, and trade book publishers eager to take business and

market share away from university presses.

The basic competitive advantage of university presses was

undermined by these competitors (i.e., the ability to dominate the

publishing of scholarly books and the key channels of

distribution)

The Response of University Presses

Some presses reevaluated their basic business model andreduced print runs, cut “split runs,” dropped or curtailedunderperforming book categories (especially in the humanities)changed domestic distributors, etc.

Some presses issued jeremiads; others sought increases inuniversity support and/or foundation funds to counterbalance thedecline in sales.• Many of these presses did not trim title output or increase

suggested retail prices.• Many of these presses failed to realize that the laws of supply

and demand cannot be rescinded.

Some strategies worked; some did not.

Key Questions

University presses faced intense competition in the marketplace.

1. Can university presses develop realistic business models and marketing plans and regain their competitive advantage?

2. What are the basic book profit and loss (P & L) assumptions of the typical university press?

3. Can these presses challenge the hegemony of large, global commercial publishers?

4. In light of the rapid advances in technology, are university presses relevant and needed in the 21st Century?

The Basic University Press Book Profit and Loss (P & L) Statement: Basic Assumptions #1

Print run 1,000

Gross sales 970 (- 30 copies; -3%; author’s copies, etc.)

Sales

Export 20 copies

General retailers 183 copies

College adoptions 239 copies

Libraries/Inst. 184 copies

Direct to consumers 20 copies

Total Sales 646 copies

Suggested retail price $65.00

Average discount47% (publisher nets $34.45/copy)

P & L: Basic Assumptions #2

PPB $5,341.13 (19% of net sales; ind. avg.)

Plant $1,124.45 (4% of net sales; ind. avg.)

Marketing $1,000 ($1/total print run of 1,000 copies)

Royalty advance 0

Royalty rate 0% 1st 500 copies; 10% net +501 copies

Subrights $200 (50%-50% split publisher/author)

P & L: Basic Assumptions #3 Revenues & Expenses

1. Gross sales $33,416.50 (970 copies/$34.45@)2. Returns - 5,856.50 (170 copies/$34.45@)**3. Net sales $27,560.004. Plant - 1,124.455. PPB - 5,341,13 (5341.13/1,000 copies = $5.34@)6. Earned royalty - 502.97 (146 copies/$3.445@; 10%/net)7. Inven. write-off - 1,739.53 (970-646 = 324/$5.34@)**8. COGS 8,699.08 (#4+#5+#6+#7 above) Initial Gross margin $18,861.00 (#3 - #8)Other income 100.00Final gross margin $18,961.00Marketing - 1,000.00Overhead - 8,268.00 (30%/net sales; ind. avg.)

Net profit/loss +9,693.00

**Assumes 170 returned copies and 154 copies that remained in thewarehouse and never shipped for a total of 324 copies.

Financial Status of University Presses: 2001-2006

Our investigations-interviews indicated:• 7 out of 10 new books lose money• 2 new books break even financially• 1 new book is a financial “hit”

Our review of the financial data for 63 presses revealed that,Between 2001-2006, all 63 presses posted financial losses in netoperating income• i.e., total book sales + other publishing income – operating

expenses, editorial, production, design, fulfillment/etc.)

When subsidies/grants are included, 63 presses posted losses in2001, 2002, 2003 and positive results in 2004, 2005, 2006.

We estimate positive results in 2007 and negative results in 2008.

Recommendations

Very few university presses are at a university with “unlimited” financial resources(i.e., endowments).

In order to survive, the vast majority of university presses shouldconsider the following:• Adopt an “Open Access” (electronic/digital) policy• Charge a fee to cover initial in-house editorial review costs (perhaps $250) and

a 2nd fee (perhaps $250) to cover peer review processes**• After a ms. has been peer reviewed and accepted for publication, charge a book

production- publication fee (perhaps $10,000)**• Waive some/all fees for academics from developing nations

Would any fee structure place an unreasonable burden on an authorand/or his/her college?

What impact economically would an “Open Access-POD” policy have on atypical university press?

** Suggestions.

Typical University Press Open Access-POD P & L: Basic Assumptions

Print run 0

Net sales 25 (POD)

Suggested retail price $ 30.00 ($10 unit manu. cost)

Average discount 0

PPB 0

Plant $1,124.45

Marketing 100.00

Royalty advance 0

Royalty rate 10%/POD net sales

Subrights 200.00 (50%-50% split)

Typical University Press Open Access-POD P & L: Revenues and Expenses

1. Gross sales $ 750.00 (25 copies/$30@)2. Returns 03. Net sales 500.00 (25 copies/$30@ -$10 unit. Manu)4. Plant - 1,124.455. Earned royalty -50.00 (10% of $500.00 net sales)6. Inventory write-off 07. Peer review fees -250.008. COGS 1,424.45 (#4 + #5 + #6 + #7)

9. Total publishing Inc. $10,850.00

100.00 (subrights) 250.00

(submission fee) 500.00 (net

sales) 10,000.00 (prod.- pub. fee)

Open Access: Revenues and ExpensesTotal revenue $10,850.00

Plant -1,424.45Marketing - 100.00Overhead -3,000.00 (30% of $10,000 fee)COGS 4,524.45

Net Profit/loss 6,325.55

Small press 20 titles $128,511 profit (20 x $6,324.55)Large press 100 titles $632,555 profit (100 x $6,324.55)

Other income $25,000 ($250 sub. fee x 100 submissions; 10 subs /1 pub. book

ratio)

Other expenses/transition years warehouse expenses

Final Recommendations

1. End a “print only” policy and adopt an Open Access/POD policy by 2012-2013

2. Universities should end all direct university press subsidies by 2012-2013

3. Peer review standards should be maintained by each press4. Each press should determine appropriate Open Access fees;

fees could be waived for academics in developing countries5. Sell only POD copies6. Work with NGOs, etc., to develop a global distribution policy

for Open Access books 7. Evaluate the successful Open Access policies of National

Academies Press; The World Bank; etc.8. Develop a plan to convince deans, etc., of the merit of a peer

review Open Access/POD book9. Determine what backlist books are/are not covered by a

digital publishing clause in book contracts

Last ThoughtsAre university presses needed?

Will scholarship flourish if university presses disappeared andbooks were published only by commercial professional &scholarly, college textbook, and trade publishing firms?

Are institutional affiliations with universities needed by universitypresses in a digital world?

Will the “e-book reader” facilitate the transformation to an OpenAccess environment? What is the relationship between print onlysales and digital sales/downloads/site licenses?

Will university based online course initiatives work?

Will a required university Open Access only policy work?

Last Thoughts

The precise answers to these questions are, at this time,unknowable; and the published literature sheds little light onsubstantive economic issues. Please see the complete paper for alist of the cited literature.

There are no simple, easy answers to these issues.

However, we believe that a realistic Open Access policy:1. makes sense economically; and 2. will better position university presses to fulfill their mission

to disseminate scholarly knowledge and to mitigate the debilitating economic problems that are currently undermining the very foundation of these presses and threatening their future.