Zed’s Dead – Law, Finance, and the Future of Online Publishing

“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, theLaw 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 delivering value that exceeds the cost of their products (the true measure of a useful business). 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 and 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.