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Peter Schwartz

Peter Schwartz

Posted: April 22, 2010 11:38 AM

Zed's Dead - Law, Finance, and the Future of Online Publishing (Part One)

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"Whose motorcycle is this?"
"It's a chopper, baby."
"Whose chopper is this?"
"Who's Zed?"
"Zed's dead, baby. Zed's dead."

- Quentin Tarantino, Pulp Fiction

This is a two-part essay on the future of online publishing in the US. In this essay, I argue that professional publishing companies such as Thomson Reuters and Bloomberg hold the keys to the future of the news and information industry, far more than do technology companies such as Google. The goal of this essay is to offer a plausible roadmap for navigating the toughest business challenges facing the news and information publishing industries in the digital age.

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.


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.


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.

Part Two of this essay to follow.