Bertelsmann: Boldly Going Where Others Are Bailing Out

Why does the German media giant think it can profit with Random House?

What's behind the massive foray into the American book publishing business by German media conglomerate Bertelsmann? Spend a moment at the company's U.S. headquarters in the heart of Times Square and you soon find out. Chief Executive-elect Thomas Middelhoff discusses big plans for book publishing while gesturing out a 22nd-floor window--to the headquarters of Viacom Inc., the rival media conglomerate. "We have a much stronger relationship to the book business now than Viacom, Walt Disney, Time Warner, or News Corp.," Middelhoff says in German-accented English.

That was Middelhoff's intent in November when he approached media mogul S.I. Newhouse with an offer for Random House, the country's biggest book publisher. The Mar. 23 deal, estimated at $1.4 billion, gives the Munich-based parent of Bantam Doubleday Dell Publishing Group Inc. 15% of the U.S. market. When it closes, nearly 40% of Bertelsmann's $16 billion in revenues will come from books.

But why is the world's third-largest media company adding book publishing properties just as rival media giants are looking for a way out of the ailing industry? Sales of consumer books slid 3.4%, to $5.4 billion, in 1997, according to the Association of American Publishers, as fees to superstar authors spiraled, along with returns of unsold books. And profits are slim. Viacom's Simon & Schuster generated $200 million in profits in 1997--but the unit's margins were a third of those for Viacom's cable and broadcasting operations. Now, Viacom is selling at least part of Simon & Schuster. "It's becoming harder and harder to make money," laments Phyllis Grann, president of Penguin Putnam Inc.--a company that was created when Seagram Co. sold Putnam Berkeley Group to Pearson plc in 1996.

Things weren't much better at Random House, a unit of Newhouse's Advance Publications Inc. Random House is one of the most revered publishers in the world, with a rich history in literature and an ability to cater to the mass market with best-sellers such as Primary Colors and Midnight in the Garden of Good and Evil. Last year, revenues were estimated at $1.2 billion and profits were in the high single digits. "This is a gem they sold," says ceo Alberto Vitale, who will be replaced by Bertelsmann executive Peter Olson.

NEWCOMERS. But two decades after Newhouse paid $60 million for Random House, the unit's profits did not rival those of Advance's magazines and newspapers. "With a third generation coming up," says the 70-year-old Newhouse, "we had to make strategic decisions."

So why do books make sense for Bertelsmann? It owns Arista Records Inc., European broadcasters, and a chunk of America Online Inc., but its business centers on books. Begun in Gutersloh, Germany in 1835 as a Christian book bindery, Bertelsmann runs book clubs with 35 million members in Europe and North America. It will soon extend its vertical integration when it begins selling online, positioning itself to become the world's biggest book merchant. "Book publishing is not a stepchild here," Olson says. "It is our focal point."

Bertelsmann's book business is just as profitable as sister units, Olson says. Insiders say Bantam Doubleday Dell has profit margins in the low-teens--high for book publishers--with two key drivers: authors John Grisham and Danielle Steele. Bertelsmann also runs a more centralized operation than other companies with multiple imprints. "They force executives to be team players as opposed to looking out for their own turf," says Robert Gottlieb, an agent whose clients include Tom Clancy.

Book publishing could become even easier for Bertelsmann if it expands into U.S. broadcasting, letting it cross-market. It has long considered buying a film studio and may challenge a federal rule barring foreign ownership of tv stations. "We're not foreign," Middelhoff says. "We're international. I'm an American with a German passport." In book publishing, anyway, Bertelsmann is now as American as Disney.

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