The long read: It is an industry like no other, with profit margins to rival Google and it was created by one of Britains most notorious tycoons: Robert Maxwell
In 2011, Claudio Aspesi, a senior investment analyst at Bernstein Research in London, made a bet that the dominant firm in one of the most lucrative industries in the world was headed for a crash. Reed-Elsevier, a multinational publishing giant with annual revenues exceeding 6bn, was an investors darling. It was one of the few publishers that had successfully managed the transition to the internet, and a recent company report was predicting yet another year of growth. Aspesi, though, had reason to believe that that prediction along with those of every other major financial analyst was wrong.
The core of Elseviers 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. With total global revenues of more than 19bn, it weighs in somewhere between the recording and the film industries in size, but it is far more profitable. In 2010, Elseviers scientific publishing arm reported profits of 724m on just over 2bn in revenue. It was a 36% margin higher than Apple, Google, or Amazon posted that year.
But Elseviers 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%.
The way to make money from a scientific article looks very similar, except that scientific publishers manage to duck most of the actual costs. Scientists create work under their own direction funded largely by governments and give it to publishers for free; the publisher pays scientific editors who judge whether the work is worth publishing and check its grammar, but the bulk of the editorial burden checking the scientific validity and evaluating the experiments, a process known as peer review is done by working scientists on a volunteer basis. The publishers then sell the product back to government-funded institutional and university libraries, to be read by scientists who, in a collective sense, created the product in the first place.
It is as if the New Yorker or the Economist demanded that journalists write and edit each others 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.
Scientists are well aware that they seem to be getting a bad deal. The publishing business is perverse and needless, the Berkeley biologist Michael Eisen wrote in a 2003 article for the Guardian, declaring that it should be a public scandal. Adrian Sutton, a physicist at Imperial College, told me that scientists are all slaves to publishers. What other industry receives its raw materials from its customers, gets those same customers to carry out the quality control of those materials, and then sells the same materials back to the customers at a vastly inflated price? (A representative of RELX Group, the official name of Elsevier since 2015, told me that it and other publishers serve the research community by doing things that they need that they either cannot, or do not do on their own, and charge a fair price for that service.)
Many scientists also believe that the publishing industry exerts too much influence over what scientists choose to study, which is ultimately bad for science itself. Journals prize new and spectacular results after all, they are in the business of selling subscriptions and scientists, knowing exactly what kind of work gets published, align their submissions accordingly. This produces a steady stream of papers, the importance of which is immediately apparent. But it also means that scientists do not have an accurate map of their field of inquiry. Researchers may end up inadvertently exploring dead ends that their fellow scientists have already run up against, solely because the information about previous failures has never been given space in the pages of the relevant scientific publications. A 2013 study, for example, reported that half of all clinical trials in the US are never published in a journal.
According to critics, the journal system actually holds back scientific progress. In a 2008 essay, Dr Neal Young of the National Institutes of Health (NIH), which funds and conducts medical research for the US government, argued that, given the importance of scientific innovation to society, there is a moral imperative to reconsider how scientific data are judged and disseminated.
Aspesi, after talking to a network of more than 25 prominent scientists and activists, had come to believe the tide was about to turn against the industry that Elsevier led. More and more research libraries, which purchase journals for universities, were claiming that their budgets were exhausted by decades of price increases, and were threatening to cancel their multi-million-pound subscription packages unless Elsevier dropped its prices. State organisations such as the American NIH and the German Research Foundation (DFG) had recently committed to making their research available through free online journals, and Aspesi believed that governments might step in and ensure that all publicly funded research would be available for free, to anyone. Elsevier and its competitors would be caught in a perfect storm, with their customers revolting from below, and government regulation looming above.
In March 2011, Aspesi published a report recommending that his clients sell Elsevier stock. A few months later, in a conference call between Elsevier management and investment firms, he pressed the CEO of Elsevier, Erik Engstrom, about the deteriorating relationship with the libraries. He asked what was wrong with the business if your customers are so desperate. Engstrom dodged the question. Over the next two weeks, Elsevier stock tumbled by more than 20%, losing 1bn in value. The problems Aspesi saw were deep and structural, and he believed they would play out over the next half-decade but things already seemed to be moving in the direction he had predicted.
Over the next year, however, most libraries backed down and committed to Elseviers contracts, and governments largely failed to push an alternative model for disseminating research. In 2012 and 2013, Elsevier posted profit margins of more than 40%. The following year, Aspesi reversed his recommendation to sell. He listened to us too closely, and he got a bit burned, David Prosser, the head of Research Libraries UK, and a prominent voice for reforming the publishing industry, told me recently. Elsevier was here to stay.