Reed Elsevier: A Short History of Two Days in July (And Why Investors Should Care)

Use the link to access the full text report written by Claudio Aspesi, Andres Rosso, and Richard Wielechowski of Bernstein Research.  “This document reviews the potential impact on Elsevier of a transformation of the STM publishing model, triggered by the rising tide of Open Access mandates. Readers who are familiar with the basics of OA may want to go to page 8, because the preceding pages represent an introduction to OA for readers who are  new to the issue. Investors who wish to keep themselves abreast of developments on OA may consider subscribing to the SPARC Open Access Newsletter written by Peter Suber (peter.suber@gmail.com). The latest issue (9/2012) contains an excellent and in depth review of the events outlined later in this call, and we used Suber's document as a base to organize pages 8 and 9 of this call... On the 16th July, three concurrent announcements (Research Councils UK – RCUK; Finch Group and Higher Education Funding Council for England – HEFCE) deeply modified the outlook for OA in the UK. Taken together, these announcements establish a framework for introducing OA to the UK over a short period of time. - On the 17thJuly, the European Commission (EC) published its own set of documents on OA, which further raise the possibility that OA will become a prevalent mode of dissemination of scientific research, and widened the set of potential OA models ... After an initial reaction, investors largely shrugged off the issue... In reality, we think the risk posed to the Elsevier business model is substantial. We believe investors are underestimating the disruption that both the EC and even the UK policies could pose to the business 

model of Elsevier. Investors have understandably reacted negatively to the EC announcements, both because they seemed to provide a landslide momentum, and because publishers have vigorously opposed public dissemination mandates, and particularly so when they have demanded short embargo periods. In reality, however, we increasingly think that both the EC recommendations and the UK policy (if extended to other parts of the world) could prove highly disruptive to Elsevier over time. We have developed a number of scenarios for the impact of a global adoption of policies like the UK one, and estimate that it could drive the profitability of the journal business of Elsevier down by as much as 60% ... The potential impact on the profitability of Reed Elsevier should not be underestimated. We estimate that STM journals represent only 17% of Reed Elsevier group revenues, but they may account for as much as 25% of the group operating profit. In the past we have argued that the budget constraints affecting academic libraries would impede returning to organic growth in the 5%+ region, as the journals achieved before the onset of the recession of 2008. Our model is still based on the assumption that OA would not happen, and that investors would see the impact of this budget crisis primarily through the progressive decline of the organic revenue growth rate below consensus expectations. A collapse of theprofitability of Elsevier would be catastrophic for Reed Elsevier. Looking at our 2015 forecasts, a decline in the profitability of the Elsevier journals (our best case) following a global shift to Gold OA would reduce group adjusted operating profit by c. -14%, while the collapse to a negative profitability (our base case) would shrink it by c.-27%...”