Friday, October 14, 2011

Wiley's Financials

Two postings by Ann Okerson to the "liblicense" mail alias about Wiley's latest financial report reveal a detail about the way Wiley reports its financial data that I missed, and that means I may have somewhat over-estimated its profitability in my post on What's Wrong With Research Communication?. Follow me below the fold for the details.

Ann asked industry analyst Sami Kassab to comment on the report. He points out that, unlike Elsevier, Wiley reports the "direct contribution to profit" of its divisions. In other words, Elsevier allocates indirect costs to its divisions before reporting their profit, but Wiley does not. This makes their divisions appear more profitable than they really are, and makes comparisons among publishers more difficult.

Sami estimates Wiley's "comparable profit margin is closer to 28-30%. Informa and Elsevier are on c. 35%." as against my estimate of 41%. Using Sam's estimate would make Wiley's net profit about $198M and the proportion of subscriptions that flow to the shareholders about 20%.

Two points should be made about this correction. It is only an $80M change in a $1500M number, or 5%, which is well within the margin of error. But, more importantly, it emphasizes that companies have many ways of massaging the picture their accounts paint of their operations. It is true that the way Wiley reports conveys less information than the way Elsevier and others do. But Elsevier and others can also obscure information, for example by adjusting the prices their divisions charge each other for services. Increasing the price makes the selling division look more and the buying division less profitable.

Sami also puts the academic publishing giants profitability in a broader perspective. He says:

"legal publishing (Westlaw and LexisNexis) operate on lower operating profit margins (c. 25-30% for West and 15-20% for LexisNexis), financial information (Reuters, Bloomberg) are on around 20%, educational publishing (i.e school textbooks and college textbooks) operates on c. 10-15% for school and 20-25% for college textbooks. Within Media, the marketing services industry (Omnicom, Interpublic, Publicis, WPP) generates 12-17%. Newspapers (when not dead) tend to generate 10-15% operating profit margins. TV Broadcasting is on 10-15%.

Google operates on similar operating profit margins at 30-35%. The only Media segment that I know off with higher margins is the Yellow Pages industry with 45-50% but rapidly declining."


David. said...

Less understandable confusion about publisher finances comes from David Crotty (of Oxford University Press) and is repeated by T. Scott Plutchak thus:

"PLoS achieved a 20% margin in 2010, and if the trends continue, could conceiveably surpass Elsevier's margin for 2011."

This is a seriously misleading assertion. The 20% number treats foundation grants as income. In 2010 PLoS had expenses of $12.2M and operating income excluding grants of $13M, for an operating margin of 6%. In addition they got $2.1M in grants. They presumably applied for these grants in 2009, when their operating margin was -10%. Had they been running a 20% operating margin, they would not have got the grants. [Source: 2010 PLoS Progress Update page 11].

Treating this grant income as operating income and projecting it to increase in the future is unrealistic.

This is not to disagree with the fundamental point underlying David and Scott's posts, that Open Access publishers also need a viable business model. But, by greatly exaggerating PLoS' margins, they obscure the important point that PLoS delivers far more quality content per dollar extracted from the community that do commercial publishers such as Elsevier. I pointed this out in post last year. My point is reinforced by this PNAS paper, which shows that both on a per-page and a per-citation basis not-for-profit publishers are several times as cost-effective as commercial publishers.

If OA publishers such as PLoS can make OA work even for their best content, this will render the margins of the big commercial publishers unsustainable.

David. said...

PLoS finances, like all publisher finances I have come across, are less clear than first appears. Here is what I believe is a more realistic analysis. It is important to note that PLoS publishes 7 journals, although PLoS ONE is by far the biggest. To simplify matters, I will try to analyze just PLoS ONE.

In 2010 PLoS ONE published 6800 papers at $1350 each. Thus the author fee income for PLoS ONE was $9.18M. This is 76% of the total author fee income for PLoS.

PLoS had $1M in income from advertising, membership and interest. 76% of this is $0.76M, making the total income I attribute to PLoS ONE $9.94M.

PLoS expenses were $12.21M. 76% of the expenses are $9.28M. Thus PLoS ONE's operating margin is 6.6%.

David Crotty expects PLoS ONE to publish 12000 papers in 2011. At $1350 each, that is author fee income of $16.2M.

The other income does not scale with publishing volume so, for the sake of argument, I assume it does not change. Thus PLoS ONE total income would be $16.96M.

It is likely that PLoS still has economies of scale to realize. But for the sake of argument I ignore this, and assume that costs scale with volume. So PLoS ONE expenses would be $16.38M, giving an operating margin of 3.4% for 2011.

Note that in practice, the other income would probably rise a bit, and there would be some economies of scale, so that the eventual margin would be bigger than 3.4%. But not 10 times bigger, as is implied by the claim of Elsevier-level margins.

David. said...

Depending on who you believe, Chancellor Katehi of UC Davis is either responsible for campus police pepper spraying peaceful protectors, or so ineffectual that she could not get campus police to obey her orders not to do so. This is not the only reason why she isn't a suitable chancellor. Since the incident, others have been highlighted, from her involvement in the Illinois "clout" scandal to her involvement in suppressing dissent at Greek Universities.

Now yet another reason appears. Chancellor Katehi receives more than $100K/yr for serving on Wiley's board. This fact does not appear in her official bio nor her offical CV.

Given her position as the Chancellor of a cash-strapped University, it seems inappropriate for her to serve unacknowledged on the board of a supplier. Indeed, her lavish salary from Wiley forms part of the 80% of the subscription dollar that does not flow to Wiley's bottom line, which is a conflict of interest when it comes to subscription decisions. But more significantly, as Roy M Poses, MD points out, "By accepting a position on the board of directors of an academic and medical publisher that also runs a MECC [medical education and communication company, i.e. a marketing shill], Ms Katehi has taken on fiduciary responsibility for the company, and thus seems to have a potentially intense conflict of interest, particularly affecting her leadership of a medical school and academic medical center".