Arvato Is Printing Money

The media-services business is Bertelsmann's unsung powerhouse

BMG Music. Random House. Gruner + Jahr. All are world-renowned properties owned by German media behemoth Bertelsmann. But they have one other thing in common: Each is outperformed by a little-known Bertelsmann media-services business called Arvato. In 2004, Arvato reported revenues of $4.52 billion, more than any other Bertelsmann division except the RTL Group television unit. It ranked second in profits, too, with $373 million, and its success is making Hartmut Ostrowski, the 47-year-old chief executive, a leading candidate for the top job at Bertelsmann when current CEO Gunter Thielen retires in 2007.

Arvato showcases how Thielen has shifted Bertelsmann's focus away from the flashy and risky deals favored by former CEO Thomas Middelhoff to concentrate on organic growth. Middelhoff once suggested selling Arvato, saying its bricks-and-mortar businesses didn't fit with Bertelsmann's glitzy image in the Digital Age. But no one is thinking about selling the unit now. Ostrowski estimates sales this year will top $4.8 billion and grow to more than $7 billion by 2010.

The division started out as the printing arm of Bertelsmann, publishing books and magazines developed by the company's various divisions. It jumped into the outsourcing business in the early 1960s, when it began selling printing and logistical services to third parties. But sales didn't take off until 2000, when outsourcing became a global buzzword and Thielen, then Arvato's CEO, steered the company into services. Now some 85% of Arvato's revenues come from outside accounts.

Some of the world's biggest companies are clients of Arvato. It runs customer-service centers for McDonald's Corp. (MCD ) and Nokia Corp. (NOK ) It handles shipping for Microsoft Corp.'s (MSFT ) X-Box in Europe, and distributes digital content such as ringtones for mobile-phone operators Vodafone Group PLC (VOD ) and T-Mobile International (DT ).

It manages customer loyalty programs such as Lufthansa's (DLAKY ) Miles & More. "Arvato is often treated as just a printing company, but its main growth drivers are services and call centers," says Maurice Rosenthal, a research analyst at Dexia Bank in Belgium. "It's basically handling customer resource management for big companies, and it's an enormous contributor to the Bertelsmann group."

In fact, services now rival printing as a revenue source for Arvato, with both accounting for 42% of sales. Its call centers handle 50 million inbound and outbound calls a year and provide customer service in more than 20 languages. "The services business will continue to grow. That's the real driver," says Rosenthal. Arvato may not be a household name, but this business could soon rival recordings and magazines for pride of place at Bertelsmann.

By William Boston in Gütersloh, Germany

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