A Rallying Cry from Bertelsmann's New CEO

Hartmut Ostrowski has made some bold promises for the German media giant. To keep them, he'll have to take on the Internet

Given the string of numbers he rattled off, Hartmut Ostrowski could have been speaking to a crowd of restive shareholders when he made his debut speech as Bertelsmann's almost-chief executive officer in Berlin on Dec. 13. Ostrowski, who assumes the top job at the German media company on Jan. 1, vowed to boost sales 50%, to $44 billion, by 2015 and increase operating profit 60%, to $4.4 billion. He promised to restore Bertelsmann, which is suffering from flat sales and declining profit, to the top ranks of global media groups. "Growth is the basis of everything," Ostrowski declared.

Ostrowski even set a target for return on capital invested: at least 8%. It was the type of financial geek-speak that fund managers love to hear, but the audience consisted of 600 executives of the family-owned company, which remains privately held. The remarks, released just after the speech, signaled Ostrowski is keenly aware that Bertelsmann, owner of Random House books, magazine publisher Gruner + Jahr, and broadcaster RTL Group, must grow much faster and be more profitable if it is to continue playing in the same league as companies such as News Corp. (NWS), Time Warner (TWX), or Walt Disney (DIS)

Plagued by One-Time Charges

Ostrowski, 49, also signaled he will be a different kind of leader from his predecessor, Gunter Thielen, who is retiring. Thielen presided over a period of consolidation at the company, which is based in the Westphalian town of Gütersloh. In the past few years, Bertelsmann has trimmed costs, put its troubled music business into a joint venture with Sony (SNE), and backed out of an initial public offering set in motion by Thielen's predecessor, Thomas Middelhoff, now CEO of retail holding company Arcandor (AROG.DE).

But despite efforts by Thielen to foster more entrepreneurship, Bertelsmann—like a lot of media companies—has had trouble finding enough growth to compensate for the havoc wrought on traditional businesses by the Internet. Sales rose just 1.2% in the year through September, to $19.4 billion, excluding effects from the sale of some units. Net income fell 66%, to $193 million, burdened by one-time charges such as a court settlement stemming from Bertelsmann's ill-fated partnership with digital file-sharing site Napster (NAPS). (Operating profit rose 5% in the period, to $1.5 billion.)

In the first half of the year, the last time Bertelsmann reported earnings for its individual units, two of six divisions were in the red. The BMG Music business and the Direct Group book and music clubs division both suffered from the shift of the music market from CDs to digital downloads.

A Local Talent

Bertelsmann's problems are typical of the media industry, and Ostrowski will have to be an atypical manager (BusinessWeek.com, 1/19/07) to solve them. Conversations with several Bertelsmann insiders indicate there is cautious optimism he will be able to do so.

Though he has acquired a public image as something of a local yokel because he spent most of his life around Gütersloh, Ostrowski may in fact prove to be a bigger risk-taker and dealmaker than his résumé suggests.

Ostrowski, currently chief of Bertelsmann's Arvato services division, played an important role in converting the unit from a printer and distributor into an outsourcing company (BusinessWeek.com, 10/31/05) that repairs mobile phones and even manages city services for a British municipality. His track record at Arvato suggests he won't be afraid to push Bertelsmann outside its traditional businesses.

Ostrowski also won't be afraid to sell traditional businesses that aren't making money, as he made clear in his speech to managers. "You're not going to turn a lamb into a lion," he said. "We have to evaluate our business areas and—if necessary—take tough decisions." There is speculation one of the sacrificial lambs might be the U.S. book and music clubs, which Ostrowski could sell to raise money for faster-growth businesses.

Seeking More Superstars

Finding those faster-growth businesses will be the hard part. In his speech, Ostrowski mentioned education, services, and the Internet. Of those three the Net will be the trickiest to master. The next business to face a shift to digital distribution will be RTL Group, Europe's largest TV broadcaster and the company behind the widely exported American Idol casting shows (known as Pop Idol in Britain and Germany Seeks a Superstar in Bertelsmann's home country). RTL has become by far Bertelsmann's biggest moneymaker, delivering $745 million in the first half, or 71% of operating profit.

But critics say RTL is still too dependent on traditional ad-supported broadcasting and must do more to avoid being overwhelmed by the same online tsunami that has devastated the music business. At RTL and throughout the company, Ostrowski will push for faster decision-making and will more energetically tweak Bertelsmann's portfolio of businesses using a $10 billion war chest (BusinessWeek.com, 3/21/07) to make acquisitions when necessary.

To put his stamp on the company, Ostrowski may also have to impose more centralized control. Mandates from the top never go down easily at Bertelsmann, where the units often think of themselves practically as independent companies. Sounding a bit like Captain Kirk rallying his crew on the bridge of the Enterprise, Ostrowski appealed to his managers in Berlin to support him. Bertelsmann must "explore paths that no one has ever gone down before," Ostrowski said.

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