Difference between revisions of "Business Models"

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(Definition of an Open Access Contribution)
(Open access contributions must satisfy two conditions:)
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Establishing open access as a worthwhile procedure ideally requires the active commitment of each and every individual producer of scientific knowledge and holder of cultural heritage. Open access contributions include original scientific research results, raw data and metadata, source materials, digital representations of pictorial and graphical materials and scholarly multimedia material.
 
Establishing open access as a worthwhile procedure ideally requires the active commitment of each and every individual producer of scientific knowledge and holder of cultural heritage. Open access contributions include original scientific research results, raw data and metadata, source materials, digital representations of pictorial and graphical materials and scholarly multimedia material.
  
===Open access contributions must satisfy two conditions:===
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====Open access contributions must satisfy two conditions:====
 
The author(s) and right holder(s) of such contributions grant(s) to all users a free, irrevocable, worldwide, right of access to, and a license to copy, use, distribute, transmit and display the work publicly and to make and distribute derivative works, in any digital medium for any responsible purpose, subject to proper attribution of authorship (community standards, will continue to provide the mechanism for enforcement of proper attribution and responsible use of the published work, as they do now), as well as the right to make small numbers of printed copies for their personal use.
 
The author(s) and right holder(s) of such contributions grant(s) to all users a free, irrevocable, worldwide, right of access to, and a license to copy, use, distribute, transmit and display the work publicly and to make and distribute derivative works, in any digital medium for any responsible purpose, subject to proper attribution of authorship (community standards, will continue to provide the mechanism for enforcement of proper attribution and responsible use of the published work, as they do now), as well as the right to make small numbers of printed copies for their personal use.
  

Revision as of 14:49, 18 September 2008

What is a Business Model?

The concept of Business Models (BM) needs some clarification. It is a concept much spoken about, but more rarely defined. We will rely on Wikipedia for the description and definition following here. The article describes Business Model in this way:

[…]describes a business model as consisting of nine related business model building blocks. Thus, a business model describes a company's business:

Infrastructure

  • core capabilities: The capabilities and competencies necessary to execute a company's business model.
  • partner network: The business alliances which complement other aspects of the business model.
  • value configuration: The rationale which makes a business mutually beneficial for a business and its customers.

Offering

  • value proposition: The products and services a business offers.

Customers

  • target customer: The target audience for a business' products and services.
  • distribution channel: The means by which a company delivers products and services to custom-ers. This includes the company's marketing and distribution strategy.
  • customer relationship: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.

Finances

  • cost structure: The monetary consequences of the means employed in the business model. […]
  • revenue: The way a company makes money through a variety of revenue flows. A company's income.

These 9 business model building blocks constitute a business model design template which allows companies to describe their business model.

For a more detailed discussion of business models and how to work with them, see Osterwalder 2007.

Even if the concept of BM can be described in a few words, as above, applying this model on any given business will take amounts of work and intelligent analysis. A Business Model can in principle only be used on an actual business, like a scientific journal or a publishing house. Here we will focus on some implications of this model thinking on how Open Access journals must perceive their business – as opposed to that of their publisher, or TA journals – in general, trying to focus on factors that are common to OA journals as such, with emphasis on traits where OA journals are different from TA journals.

General remarks

Open Access (OA)

There are various “flavours” of OA, and clarification is necessary in order to establish a foundation for this report. Open Access can mean anything from giving free access to read editorial content for the time being, to giving away all rights to exploit the content for perpetuity to the general public, for free.

Here, OA will be taken to mean Open Access as described in the Berlin Declaration:

Definition of an Open Access Contribution

Establishing open access as a worthwhile procedure ideally requires the active commitment of each and every individual producer of scientific knowledge and holder of cultural heritage. Open access contributions include original scientific research results, raw data and metadata, source materials, digital representations of pictorial and graphical materials and scholarly multimedia material.

Open access contributions must satisfy two conditions:

The author(s) and right holder(s) of such contributions grant(s) to all users a free, irrevocable, worldwide, right of access to, and a license to copy, use, distribute, transmit and display the work publicly and to make and distribute derivative works, in any digital medium for any responsible purpose, subject to proper attribution of authorship (community standards, will continue to provide the mechanism for enforcement of proper attribution and responsible use of the published work, as they do now), as well as the right to make small numbers of printed copies for their personal use.

A complete version of the work and all supplemental materials, including a copy of the permission as stated above, in an appropriate standard electronic format is deposited (and thus published) in at least one online repository using suitable technical standards (such as the Open Archive definitions) that is supported and maintained by an academic institution, scholarly society, government agency, or other well-established organization that seeks to enable open access, unrestricted distribution, inter operability, and long-term archiving.

This means that here OA journal will mean (unless the context makes it clear that it is meant otherwise or this is explicitly stated) a scientific journal published electronically on the internet with the full content being made available for free to anyone with internet access, giving away all rights to exploit the content further electronically, as long as the author’s right to be cited as author and being loyally quoted is not violated.

This is not to say that other definitions of OA may not be as valid as the Berlin definition, but the Berlin Declaration definition seems to be the most widely accepted definition in the OA community. Other definitions, whether explicit or implicit, often leave more business model options open to the publisher. While this may be of interest, in this analysis the most “extreme” definition of Open Access makes for the most interest-ing discussion.

Toll Access (TA)

Toll Access is the traditional model for scientific journal publishing, with readers having to pay for access to content. This is no longer synonymous with paper-based publishing, but as the general model seems to be to provide both paper-based and electronic access to content, TA journals are strongly modelled on the paper version and its affordances.

The Publisher vs. The Journal

This wiki will focus on the journal, not the publisher. One must bear in mind that the business model of the journal could be quite different from the business model of the publisher. One reason for the present discussion of OA might be just the fact that in many instances the business models, and business interests, of publishers, and those of scientific journals, might be in conflict with each other. The journal is, after all, the means for the publisher to reach his goals – while the publisher is the means for the journal to reach its goals. This is a kind of symbiosis that can be filled with conflict, at least when the goals of the journal and the publisher are at odds with each other.

Profit vs. Non-profit

One should also bear in mind that both OA and TA journals may be profit-maximizing businesses – or be interested in maximum distribution while breaking even, as to cover costs. There is no clear equation that says that OA equals non-profit (or altruism), and TA blatant profit maximizing, though one might see some tendency that OA journals seem less profit-oriented than TA. This might, however, be due to the fact that OA journals have not yet found the same constantly profit-creating business models as TA journals have.

The major OA publishers are businesses that will be just as profit-oriented as their TA counterparts, but they will have to find other means of generating that profit. And it might be possible that OA publishing models make the level of profit seen among some TA publishers impossible to reach. And it is also conceiv-able that the means of generating profits for an OA publisher will not be at odds with the goals of science and scientists to the degree that TA publishers’ business models seem to be.

When you analyze your business, you have to be clear about whether your goals are economic, i.e. that you want to make profits from publishing your journal(s), or whether your goals are dissemination within eco-nomic limits.

The market

A major difference between TA and OA journals is that they operate in different markets, with markedly different economic traits. In the following, I will describe some of these differences, as an understanding of these differences is important in order to understand the economics of OA journals.

The market for TA journals

TA journals sell content to readers, or to representatives of readers. In a marketplace where there is free competition, sellers have to compete for buyers, and there is no room in an efficient competitive market for prices that yield high profits – such prices would make it interesting for more sellers to enter the market-place, driving prices down. TA journals do not compete in such a market. Where there are more than one journal that covers an area of science, readers cannot satisfy their needs by buying a journal at random, be-cause the content of one journal is no substitute for the content of another journal, unlike when choosing between different brands of e.g. soft drinks. The market for TA journals is termed a monopolistic market, because every journal is in a sense a monopoly in itself.

Another feature of the classical market is that there for any one buyer is a limit to how much one wants to buy, irrespective of price. This is a result of the (rapidly) decreasing marginal utility of consuming another unit of the good. If you want a bottle of soft drink to quench your thirst, your interest in yet another bottle will be marginal compared to your interest in the first bottle. As we all know, having access to one scientific journal does nothing to quench our thirst for access to yet other journals in the same field, to the extent journals cite one another having one will make one want the others. What limits the number of journals a library subscribes to is the library budget, and within that budget, journals are (mainly) chosen for their importance, not by price.

A seller in a competitive market has to accept a market price that he cannot do much to influence. In a monopolistic market, the seller has to consider his pricing strategies. If the seller lowers his price, he has to consider that the reduction may sell more copies, but at the same time, the price reduction will lower the revenue from the original sales volume. This has the effect that in a monopolistic market the market price will be higher and the volume lower, than in a competitive market.

The consumer surplus and price discrimination

In any market, competitive or monopolistic, where there is only one price for a product, there is a consumer surplus. Many buyers would have been willing to buy the product at a higher price. For each such buyer the difference between the market price and what the buyer would have been willing to pay, is a win for the buyer and a loss for the seller. The sum of these differences is the consumer surplus in the market.

If the seller could negotiate prices individually with buyers or groups of buyers, he could increase his prof-its through exploiting the consumer surplus. Such a differentiation of prices is called “price discrimination”. Price discrimination only works in markets where products cannot efficiently be traded between buyers; else, buyers who face low prices could buy more and sell their surplus to buyers who face higher prices.

A practical example of price discrimination is in the market for consumer electronics. New products are introduced at high prices. When consumers who are willing to buy at high prices have been exhausted, the prices are lowered a bit to reach new groups of consumers, this is repeated until the products are mainstream and sell at prices that to a greater extent reflect production costs. Such a model with prices varying over time cannot be used for subscriptions, though one could see selling back copies at a discount price as a variation of the model.

The effect of price discrimination is that sellers can sell more while still earning more than in a situation where you have a monopolistic market without price discrimination. With price discrimination, some buyers will face the same price as in a competitive market, a price that reflects the marginal cost of the seller for providing the good or service in question – again, a price that is lower than the seller could sell at without price discrimination.

In the traditional market for TA journals, price discrimination was limited to having different subscription prices for institutions, individual subscribers and student subscriptions. The cost of negotiating individual subscription rates would far exceed possible extra income generated.

The mechanism that allows TA journals to use price discrimination efficiently as a strategy to enhance their profits is bundling journals and selling bundles (or licenses to bundles) to institutions. While traditional pric-ing strategies would let all institutions meet the same subscription prices, making small and poor institutions pay the same as large and wealthy, bundling and negotiating allows publishers to tailor prices to institutions’ size and financial abilities. As letting buyers pay according to their financial ability will increase revenues without increasing costs, publishers’ profits are increasing.

The marginal cost of distributing a bundle of electronic journals is very small, thus can price discrimination strategies allow publishers to sell bundles to poorer institutions, e.g. institutions in poor countries, at virtually no cost to the buyer. Even giving away free subscriptions to bundles may be rational, because it both will create more citations for the publisher’s journals and create a demand that makes it possible to charge for subscriptions later.

The market for OA journals

One of the defining facts about OA journals is that they do not sell content to readers, they give it away. But there are buyers also in the OA market, otherwise OA journals would have no income. If we overlook institutional support as a source of income, the important buyers are the authors. They buy quality assurance and branding, author services and access to a readership through the journal.

While TA journals are small monopolies because the content of one journal is no substitute for the content of another journal, the quality assurance, branding, author services and readership of one OA journal are not substantially different from that of another journal. While OA journals, through various means, would like to brand themselves as being in some sense different from, and better than, other journals in the same subject area, these differences are less significant than the difference in content between journals in the market for TA journals. For an author, Journal A is an acceptable substitute for Journal B, even if it is not an exact simi-larity between them. Therefore, OA journals must compete in a market that more resembles the traditional competitive market. They have to compete for content through a combination of what they offer the author and what price they charge. Thus, OA journals do not have the same possibilities as TA journals for creating excessive profits for their owners.

The different markets for journals

One must conclude that there really are two different markets for journals. One for TA journals, which is characterized by monopolistic competition and excessive profits to publishers. Trading is to a large extent done through negotiations between representatives of readers (libraries/library consortia) and large publishers. The end-users, the readers, see little or nothing of the costs incurred.

The other market is for OA journals. This market is competitive, through differences in price versus service quality, and the costs are generally very visible and felt by the authors as end-users, who often have to pay the costs out of their research funds.

The two markets interact – the readers and the authors are the same persons, irrespective of market – and the total costs for journals are funded through the same institutional budgets. But there is a major problem: The real decision makers as to which model to use, which market to participate in, are the users in their capacity as authors. The authors face quite different costs in the two markets: None in the TA market, where costs are hidden in institutional budgets invisible to the authors, and article processing charges (often EUR 1250–2500) levied on the authors research budgets in the OA market. This “uneven playing field” where OA faces financial obstacles that TA do not face, makes for unfair competition between the two models of jour-nal publishing.

The efficiency caveat

One could easily be led to believe that the diminished possibilities for excessive profits in the OA model in itself would be an argument for its being more beneficial to science.

This only holds true if all other factors are equal between the two models. TA journals (at least the more profitable ones) are often published by large commercial publishers that have gained a lot of experience and competence in publishing journals. There are many reasons to believe that there are economies of scale in journal publishing, i.e. that the larger the volume published by a publisher, the lower the per article cost of publishing.

OA journals are generally published by smaller publishers, and all commercial OA publishers are relatively new firms – and OA publishing is different from TA publishing, meaning that reusing TA publishing experience in OA publishing firms does not necessarily provide maximum efficiency.

There is therefore reason to believe that costs in the OA publishing business is higher than in the TA publishing business, even if OA publishers face lower distribution costs than TA publishers do. If costs are higher, to a greater extent than profits are lower, OA publishing is not a profitable model for science at the present. Both size and competence will increase over time, given the present trends, decreasing relative cost inefficiencies in OA compared to TA.

Increased costs in the OA model could also be offset by the value of increased dissemination of scientific results through OA publishing – but this not make it financially better than the TA model.

There is reason to believe that over time, and as volumes expand and efficiency increases, OA will be economically better for science than today’s TA model – but we may very well not be there, yet.

The question of efficiency and economies of scale makes it imperative that OA publishing be organized not as individual one-man shows but in larger units, preferably as medium-sized publishing companies. Such companies should be large enough to be reasonably efficient, yet small enough not to be able to exploit market inefficiencies.