"Whose motorcycle is this?"
"It’s a chopper, baby."
"Whose chopper is this?"
"Zed’s"
"Who’s Zed?"
"Zed’s dead, baby. Zed’s dead."
- Quentin Tarantino, Pulp Fiction
In the 1980s, Westlaw (now owned by Thomson Reuters) and LexisNexis (now
owned by Reed Elsevier) built multi-billion dollar businesses by using law firms
as data wholesalers. By encouraging law firms to charge business clients for
expensive legal research services, they extracted sizable profits and built
enormous empires that greatly exceeded the value their research was providing.
I first wrote on this topic last year in an
essay published in the Huffington Post. At that time, the essay
elicited some heated reaction. The Law Librarian Blog
replied that Westlaw and Lexis were doing just dandy, and that the threats
they faced were not from inflated online research pricing models but from
library print subscription cancellations. Lisa Solomon of the Legal Research
& Writing Pro blog simply
wrote that I was "dead wrong", although her argument didn’t extend beyond
"like it or not, Mr. Schwartz, Knowledge Mosaic isn’t the disruptive entrant
into the legal research market that you paint it to be."
Well that’s fine. But here’s the funny thing. On March 6 of this year, the
Law Librarian Blog reversed course and published an
essay arguing that the case for cost recovery of online research has fallen
apart in the 21st century. And three months before her "dead wrong" post, Ms.
Solomon
wrote, "The cost of a firm’s online legal research subscription is a part of
overhead that should not be passed on to clients."
As for Westlaw and Lexis? They are not thriving. Thomson Legal’s revenues
fell in 2009, particularly revenues from larger law firms. Profit margins for
both Thomson Reuters and Reed Elsevier have plunged. With Bloomberg Law now
attacking the legal research market with a pipe and a chainsaw, blood is going
to flow. One of the first casualties will be legal research cost recovery.
I
Why does the fate of legal research cost recovery matter? I am going to
reverse course here for a moment and appear to contradict what I’ve just
written.
The fate of legal research cost recovery matters because the business of
professional publishing holds the key to the dissemination of news and
information everywhere. This is at least part of the untold story about how news
and journalism will find a sustainable business model in the 21st century.
Google is a sideshow (albeit
an interesting sideshow).
Despite recent, recession-related struggles, professional publishing empires
such as Thomson Reuters, Reed Elsevier, and Bloomberg have become online media
powerhouses. Thomson shed its print newspapers only to purchase Reuters.
Bloomberg News is thriving while the Washington Post and the New
York Times and the Wall Street Journal crater.
Professional publishing has flourished because it does not depend on
advertising for revenue. By creating information ecosystems that cater to the
specialized needs of lawyers, bankers, traders, accountants, investment
managers, and consultants, Thomson Reuters, Reed Elsevier, and Bloomberg have
been able to charge premium prices and sustain remarkable (typically 35 percent)
profit margins, which in turn has given them the surplus needed to invest in the
healthiest of the traditional news services. The strength of their financials
and the judgment of the markets confirm their emerging dominance.
Let’s do the math. Newspaper publishers are media companies. Many now own
television networks (even film studios) and have significant online and book
publishing businesses. But newspapers remain the core of their identity.
Together, the New York Times Company, the Washington Post Company, and Gannett
generated $12.5 billion in revenue in 2009. They employed a total of 79,000
people and the markets valued these companies together at $10 billion. This
works out to $126,000 in market value per employee.
Now let’s look at the professional publishers. Many of these are also media
companies. They manage large news organizations. But they are not identified
with consumer markets. They produce more revenue and more free cash serving
largely professional markets, and are therefore rewarded with significantly
higher valuations. Together, Thomson Reuters, Reed Elsevier, and Bloomberg LLP
generated $30 billion in revenue in 2009. They employed a total of 92,000
employees and the markets valued these companies together at $55 billion. This
works out to $597,000 in market value per employee, nearly five times higher
than the market value per employee for the newspaper companies.
II
Why have professional publishing companies such as Thomson Reuters, Reed
Elsevier, and Bloomberg made so much money at the same time that
advertising-driven, mass-market publications have tanked? The answer is partly
technology. Of course, Google and craigslist have leveraged the Internet to
steal advertising revenue from print publications. But traditional print
journalism is very labor-intensive and many print media companies came late to
the realization that the Era of the Internet requires fewer people, more
technology, and a new way to tell stories.
By contrast, professional publishing companies have always leveraged
technology, and as Thomson illustrates, they have shed traditional print
newspapers that did not leverage technology. Professional publishing companies
are entirely driven by documents, data, and search. The news portions of their
business are entirely different from the traditional "deep journalism" of city
newspapers, and depend instead on short-form output, quick turnaround, and
syndication revenue models.
The financial markets value professional publishing employees nearly five
times more highly than they value print media employees because the employee
base at Thomson Reuters, Reed Elsevier, and Bloomberg leverage technology so
much more effectively.
A troubling, dispiriting question endures, however. How is it that the
professional publishers can make so much money when other publishers are
struggling merely to survive? Technology alone does not provide the answer. In
fact, the financial success of these businesses challenges the nostrum that in
the digital age, information wants to be free. If you purchase from Westlaw,
Lexis, or Bloomberg, information is anything but free. If we examine the
business models of Thomson Reuters, Reed Elsevier, and Bloomberg, we would
actually conclude that in the digital age, information wants to be expensive
(please note here that Stewart Brand actually combined both statements in his
famous
elucidation of the value of information in 1984).
What professional publishers have truly leveraged is not so much technology,
as the crazy-making financial success/excess on Wall Street, the explosion of
litigation in the United States, the high-stakes lawyering that accompanies
nearly every business transaction, and the levels of expertise required to
navigate and interpret complex layers of government regulation.
This is the dirty secret of online legal research cost recovery. Professional
publishing company profit margins aren’t byproducts of value these companies
create, but of their entanglement with and enabling of a
financial-legal-regulatory complex that stifles business innovation and economic
growth.
III
Is there justice in mortgage loan fraud? Is it fair that massively parallel
trading systems that serve no social purpose hide their light under a bushel and
reap their harvest under a cover of darkness? Does the righteousness of the law
imbue those who parcel their time out in 6-minute increments? In the era of
liquid information, are $500 database searches and 35 percent profit margins
necessary to sustain the authoritativeness – and therefore the legitimacy – of
the law (stare decisis!)?
Perhaps it doesn’t matter. The markets will decide. And when the markets
function poorly, the government will step in, should step in. That is the dance
of democracy.
However, don’t for a moment delude yourself into believing that the American
business community hasn’t noticed that it has been taken for a ride by the
banks, the traders, and the law firms. And don’t for a 6-minute increment
believe that the American business community hasn’t also observed the enabling,
supporting role in the sponsorship of this mayhem of the professional publishing
companies.
Let me give you two examples.
In its
State of the Legal Industry Survey, LexisNexis reports that
corporation counsel believe law firms are too profitable and that they are not
doing enough to reduce costs and fees. Many corporation legal departments have
shifted legal work in-house and taken steps on their own to reduce spending on
outside counsel. In response, law firm attorneys say that corporation clients
should worry less about cost and more about quality.
But if dry survey results don’t turn your crank, maybe
this will. At the Future of Education Conference sponsored earlier this
month by Harvard Law School and New York Law School, United Technologies General
Counsel Paul Beach went medieval on both law firms and (another enabler) law
schools. Here are some choice morsels from Beach.
We don’t allow first or second year associates
to work on any of our matters without special permission, because they’re
worthless.
I’m passionate about killing the billable hour.
I want to destroy the large pyramidal law firm
structure.
I don’t mind paying [lots of money] for world
class experts … but I’m not interested in the whole tail of associates that
comes with world class experts.
And what of Westlaw and Lexis? Let’s just say that corporate legal
departments don’t like paying astronomical legal research fees any more than
they enjoy getting soaked by the hour for legal advice, or losing access to
credit when the debt markets freeze up after another Wall Street bacchanalia.
Evidence for this antipathy isn’t limited and anecdotal. It is rife,
plentiful, and unassailable. Law firm attorneys and librarians themselves freely
admit that Westlaw and Lexis as necessarily evils, more focused on extracting
incremental revenue with the exquisite precision of a proctologist than on
delivery value that exceeds the cost of their products (the true measure of a
useful business). We may notice the irony of these remarks, and wonder if the
pot is not calling the kettle black. But nonetheless. Legal research cost
recovery is administratively burdensome, it poisons relationships with clients,
and it no longer pays the bills.
Specifically, the internal dynamics of large law firms dictate that cost
centers such as libraries experience enormous pressure when the bons temps
cease to roulez. In this pressurized environment, Westlaw and Lexis are
not viewed as allies in efforts to manage the cost of information, particularly
as historically successful cost-recovery systems based on billing research
charges to clients have crumbled. Corporate legal departments often simply
refuse to pay these charges, leaving the law firms to support massive legal
research expense burdens. That was never part of the bargain they made with
Westlaw and Lexis.
As an aside, law firm librarians and attorneys are interested in and excited
about Bloomberg Law as a research platform, but none would pretend that
Bloomberg will ease their budgeting burden.
IV
The (w)reckoning, should it come, will happen this way.
First, financial regulation will
curb and sequester financial engineering so that speculative derivative
transactions no longer drive the markets while hiding in plain sight. Banks will
have to return to making money the
old-fashioned way, by serving the needs of real customers, not by gaming the
markets. In theory, the great Wall Street money machine will shrink back to
something closer to what it used to be, when it represented an integral, but not
outsized (metastasized), element of the national economy.
Second, the legal profession will realize that its days of wine and roses may
also be numbered. The delusional – if not smug -
blather in the industry press about how the only challenges corporate law
firms face are to develop more transparent billing practices for their
corporation clients entirely miss the point. The great market unraveling has
shredded the conditions that supported the traditional (pyramidal) law firm
business model – unconditional client dependence on the oracular expertise of
attorneys uniquely trained to navigate the complex mysteries of the
financial-legal-regulatory complex.
And this returns us to our friends at Thomson Reuters, Reed Elsevier, and
Bloomberg, who – no less than their financial institution and law firm customers
- will have to face the reality of a shrinking market for their services. Senior
executives at these publishing companies continue to assume profit margins will
return to "norms" of 35 percent. But the market for legal and financial research
will probably never recover sufficiently to support anything close to these
margins. And with Bloomberg Law determined to lay imperial claim to the existing
market for high-priced legal research – they smell blood – we will now witness a
Shakespearean struggle of these three titans to seize control of a blasted
landscape. Will anyone even envy the winner?
V
About 30 years ago, professional publishing companies struck a Faustian
bargain with financial institutions and corporate law firms. Like the pilot fish
humping along behind a ship and inhaling the blowback from its turbines, these
publishing companies became dependent on financial extravagance, massive deal
flow, complex litigation, and intricate regulation produced by the
financial-legal-regulatory money machine. The publishing companies cannot
sustain their profit margins if this money machine ceases to exist as it has for
the past 30 years.
In the market for legal research, the money machine grinds to a halt when law
firms can no longer pass through expensive research costs to customers and have
to absorb these costs as law firm overhead. If this trend continues,
professional publishing companies will not generate the kind of surplus cash
that has given them the recent ability to reinvent themselves as media
companies.
The technology advantage of professional publishing companies is real. Now
and in the future, the dissemination of news and information will occur via
sophisticated search; instant delivery of documents and data; and deep, defined
analysis of bounded information domains. The old style of print journalism will
never really return – the new model will embrace verticals and mine data and
tell stories based on that data.
In the digital age, information does not want to be either free or
expensive. Information merely wants to be.
For this reason, their technology expertise notwithstanding, it is not a
given that the professional publishing companies will dominate the media
landscape. The organizational foundations of professional publishing companies
are expensive to support. Their cost structures require that information also be
expensive. However, Thomson Reuters, Reed Elsevier, and Bloomberg have no
monopoly on the technology, and the technology to create new information and
news delivery platforms is not expensive.
In this respect, the professional publishers have returned to being merely
ordinary companies. In the future, they will compete with new rivals without the
structural advantages that have until now fueled their growth and reinforced
their market position. This is good news for the American business community,
and for the future development of a vital, healthy, and prosperous news and
information industry in the United States.
Read more: Digital Media, Thomson Reuters, Law, Wall Street Bailout, Reed Elsevier, Information Age, Wall Street Reform, Future of Publishing, Media, Gannett, Wall Street Journal, Bloomberg, Westlaw, Publishing, Wall Street Crisis, Wall Street, finance“>Finance, New York Times, Washington Post, Media News, Newspapers, News, Lexisnexis, Business News
