The legal services market globally is about $250 billion annually. The US accounts for about 2/3 of that (yes $167 billion is a lot, that is $546 for every man, woman and child in America but from another perspective, it is ONLY 1.2% of GDP, so it is still small compared to say Healthcare and Education).
Within that $250 billion is a $5 billion market for Legal Publishing. That makes publishing about 1.2% of the services market. So, as with STM Publishing, we need to look at the wider context of the market served by Legal Publishing.
In short, Legal Publishing is still in Act 2. But we may see Acts 3, 4, 5 and 6 play out very fast.
Really Early In Act 2
Legal Publishing looks like a great business to be in for the 3 big players. The case that this is an oligopoly is argued persuasively by Kendall F. Svengalis of the Rhode Island LawPress. His May 16th 2009 PowerPoint (available on their site) is entitled Legal Information: Globalization, Conglomerates and Competition--Monopoly or Free Market? A few charts illustrate the story.
First, we see a picture of consolidation, with 3 publishers controlling 90% of the market. This happened through lots of acquisitions. This is classic Act 1.
Not surprisingly, margins are sweet:
This is unusual enough to get the attention of anti-trust regulators. It points to a market without a lot of competition as pointed out by Jeremy Grantham:
Enter The 7 Forces Of Disruption
In the introduction to this series, we described the 7 factor perfect storm hitting other markets. While the headline numbers may look great, each of these 7 factors is hitting legal publishing:
Factor # 1: Digital economics.
The publishers do not own the base data, which comes from court records. These can be replicated at close to zero cost. Semantic Web technology will make those mountains of data more accessible.
Factor # 2: Generational shift in habits.
The generation of lawyers that grew up with Facebook, LinkedIn and Twitter will look for answers outside of the normal channels; particularly if a cost squeeze forces them to be creative.
Factor # 3: Globalization of markets.
Try selling content at US/UK prices when you are selling to BRIC (Brazil, Russia, India, China).
Factor # 4: Globalization of competition.
Lawyers and publishers in BRIC countries will bring price competition one way or another.
Factor # 5: Deleveraging.
In this case the deleveraging is lawyers paying off student loans when they can no longer charge really high $ per hour rates. They simply won't pay as much for information because they cannot pay.
Factor # 6: Great Recession.
Customers are pressing legal firms for lower prices. Big firms have gone smash and many have cut back. They will seek lower costs from publishers.
Factor # 7: Regulatory change.
People in the industry are pushing for more AntiTrust action. The more radical option is Law.gov, which we will explore in the next post.
Sometimes The Acts Are Played Out Very Fast
The 7 Act Creative Destruction Play is unusual. Any playwright who tried this would fail. We tend to get a really looooooong Act 1. Act 2 is also agonizingly long for the innovators who are ahead of their time. But then we can see Acts 3, 4, 5 and 6 play out really fast. What do you mean Apple is a big music publisher, how on earth did that happen?
Investors May Sense That Something Is Up
Investors love oligopolies and the strong margins enjoyed by the big companies in those oligopolies. So their share price must be rising faster than the market as a whole? Well, no, they are not. We took the 3 companies that Kendall F. Svengalis describes as oligopolists â€“ Thomson Reuters, Reed Elsevier and Wolters Kluwer and looked at their share price compared to the S&P Index over 12 months, 6 months and 3 months:
In 12 and 6 months timeframe, investors would have done better in an S&P Index fund than any of those 3 oligopolists and only in the 3 month period would you have done better investing in one of them.
Investors make money by looking ahead. They may not be shouting "watch out for that Semantic Web wave" across the trading room floor. But maybe they should!