Bertelsmann: Building a Video Napster

By acquiring control of RTL, Europe's top TV company, CEO Middelhoff is laying the groundwork for a video file-sharing business

Napster, the wildly popular platform for trading copies of music files, could change the TV and video businesses every bit as dramatically as it has the music business. At least, that's one of the messages to be drawn from German media giant Bertelsmann's acquisition of a majority stake in RTL Group, Europe's biggest TV company, announced on Feb. 5. By taking undisputed control of RTL (Bertelsmann already owns 37%), the company is girding itself for the day when Internet users routinely could trade their favorite episodes of Benny Hill as easily as Napsterites now swap tracks by Eminem.

Bertelsmann could have continued to operate in television through the existing RTL consortium, which also includes British publisher Pearson Group. But CEO Thomas Middelhoff wanted control to ensure fast decision-making. By acquiring an additional 30% stake in RTL from Groupe Bruxelles Lambert, boosting its own stake to 67%, Bertelsmann can try to create Napster-like links with the most powerful television company this side of Hollywood.

Thus Bertelsmann took a momentous step -- trading a 25% stake in itself for the majority RTL stake. That could have huge repercussions, because in three years, Groupe Bruxelles Lambert can sell that stake on the stock market, turning Bertelsmann into a publicly listed company for the first time in its 166-year history. The message: This is one deal that tradition-heavy Bertelsmann really wanted.


  To Middelhoff, it all fits. In October, Bertelsmann lent Napster $50 million and agreed to work on converting the Internet upstart into a profit-making venue for music companies and artists. Now, he predicts that Napster, with over 50 million users, will also become a platform for exchanging video. "With luck, Napster can become a second AOL ," says Middelhoff, who made his reputation by buying a 5% stake in America Online in 1995.

But to profit from online video, Guetersloh (Germany)-based Bertelsmann needs content. It has music, via its BMG recording and publishing unit. And BMG is already trying to exploit Napster, whose latest software upgrade includes links to CDNow, a Bertelsmann unit that sells music online. RTL could provide a major video library. Among other things, the company broadcasts Formula One races in Germany and helped start the reality-show craze with Europe's Big Brother. It has a 38% market share among advertising-supported broadcasters in Germany, Europe's biggest market. In France, it claims a share of 21%.

The European TV business is set for a shakeup. With the spread of broadband Internet connections, viewers will soon be able to quickly download the latest installment of, say, Who Wants to Be a Millionaire. And the technology could open up new sources of profit by making it easier for viewers to buy products advertised on their favorite shows. For example, broadcasts of Formula One races now direct viewers to an RTL Formula One Web site where they can buy a duplicate of driver Michael Schumacher's Ferrari baseball cap.


  But the technology will also change the current assumptions. That's particularly true in Germany, where Deutsche Telekom is rushing to install broadband connections while selling off its cable-television network to outside investors. To make money, the new owners will need to convert the cable systems into conduits for interactive entertainment and shopping. "It will lead to completely new pay-TV models," Middelhoff says.

Now the stage is set for a duel between two approaches to pay-TV. The existing model is exemplified by British Sky Broadcasting Group (BSkyB). Subscribers with a special decoder on top of their TV sets pay a monthly fee for a smorgasbord of digital programming. RTL will likely base its model on the Internet: Users will download programs via broadband connections. RTL will charge a fee -- or maybe even supply programming for free and make its money through merchandising tie-ins.

Fact is, RTL is far and away the TV behemoth of Europe, with annual sales of about $4 billion. Yet its stock market value of about $14 billion is less than half that of BSkyB, which has lower sales. One reason: Investors figure there's more to be had in the long term from paying subscribers than from fickle viewers of free TV. Bertelsmann's deal with Groupe Bruxelles Lambert is an attempt to make RTL's viewers just as valuable.

By Jack Ewing in Guetersloh, Germany

Edited by Douglas Harbrecht

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