Book giant enters the big, bad world

After years of domestic hegemony, Bertelsmann is staking its future on the internet to survive in the media jungle

FROM hymn books to soap operas, Bertelsmann's ascent to the lofty club of global media giants has been spectacular.

The company is the third largest media concern in the world, and the biggest book publisher in the English language. That is something to be proud of in the sleepy north German town of Gutersloh, where Bertelsmann is still based. Nearly 60,000 employees in 50 countries are dependent on the word from Gutersloh.

Yet, instead of slapping each other on the back at corporate headquarters, the men who control so much of the globe's cultural output are filled with angst. The future seems threatening. While board members might like to congratulate themselves for scaling the summit, voices can be heard suggesting that Bertelsmann is over the hill.

Perhaps that is being alarmist. But no one disputes the fact that the company has reached the crossroads. Having stepped out of the safety of its protective and protected domestic habitat, Bertelsmann has entered a jungle teeming with the likes of Rupert Murdoch. To survive here, the Germans must change their ways quickly.

They are faced with two challenges simultaneously. Traditionally, Bertelsmann has made its money out of books, and books do not make as much money as they used to. The old ways of selling books are changing, thanks largely to companies operating on the internet.

So to protect its market share, Bertelsmann must pile into the internet; the very medium that is set in the long run to eclipse the printed word.

The second dilemma is posed by entrepreneurial culture. If the experts are right and the future is electronic then slow-moving behemoths of Bertelsmann's ilk will be finding it increasingly difficult to keep up with their smaller, nimbler competitors.

Those operate primarily in an Anglo-Saxon setting and the Germans, despite their growing role on the world stage, have remained steadfastly German and provincial.

In the past, Bertelsmann owed its phenomenal success to a "very good distribution, and disciplined attack on each of its markets", says Bernard Malhame, a senior analyst at Commerzbank.

This, he says, produced an "incredible organisation that was difficult to beat by any other local player. However, once you come out of this disciplined environment, you are faced with different challenges."

And so far, the company has not been good at meeting them. Thomas Middelhoff, the new chief executive, admits for instance that Bertelsmann slept through the computer revolution, and missed a year before it got involved with online services.

Its recent deal with the US book retailer Barnes & Noble, buying 50 per cent of its online service, is a late correction of this oversight.

Television, another important money-spinner, is also giving Mr Middelhoff headaches. While its flagship station in Germany, RTL, is highly profitable, plans to establish a foothold in pay-TV are getting nowhere. Against Mr Murdoch's multitude of new channels broadcast from a satellite somewhere near you, Bertelsmann is stuck with Premiere, a pay-TV service in Germany that gained a paltry 24,000 subscribers this year.

Plans to launch a digital service in collaboration with the Bavarian tycoon Leo Kirch have been vetoed by the European Commission.

Gruner & Jahr, the magazine and newspaper division, has been sluggish. The editor of Stern, the flagship magazine, is about to be replaced amid falling sales.

Not all is gloom, though. In a year of spectacular acquisitions, financed by cash piles generated in Germany, the company has successfully entered potentially high-revenue markets. The purchase last week of Springer Verlag, the scientific publisher, promises steady incomes and fat profit margins for years to come. And most important, Bertelsmann is at long last surfing the internet.

It says a great deal about the company's senior management that when Mr Middelhoff suggested buying into America Online a few years ago, his colleagues took him for a clown.

The 5 per cent he was allowed to purchase has since proved to be the company's most profitable acquisition, and it is because of this coup that Mr Middelhoff is chief executive today.

Aged 45 and obsessed with computers, Mr Middelhoff was regarded as something of an eccentric, and not just because he had the temerity to crack jokes at board meetings. As he demonstrated with the America Online purchase, upon which his career depended, he is a risk-taker.

"Bertelsmann is a company which does not have in the managerial ranks the entrepreneurial spirit that Mr Middelhoff possesses," says Mr Malhame.

"I think he was brought to the head of the company because he has this spirit."

Thanks to him, Bertelsmann is set for its biggest upheaval since its owner, Reinhard Mohn, returned from his Kansas prisoner-of-war camp after the war intoxicated with American ideas of running a business. In Mr Mohn's hands, the 100-year-old publisher of religious tracts was turned into a modern media company, propelled by profits from its book clubs.

Mr Mohn still pulls the strings from the background. While the new chief executive has said some fringe activities might be floated off, there is no question of selling shares in Bertelsmann itself. The Mohn family owns or controls virtually all of them.

Despite its feudal appearance, though, the company is not a one-man band, and nor does it even have a centralised structure.

Unlike other media concerns one could mention, the various divisions have enormous autonomy, the executives and even the staff are encouraged to think for themselves and decisions are reached, in true German manner, by consensus.

"We are a home for artists and talent," Mr Middelhoff said in a recent interview in Der Spiegel. You won't hear Mr Murdoch boasting like that. Bertelsmann employees are well-paid and well-treated.

But can this strange family firm compete with the likes of the Murdoch empire? It depends on whether Mr Middelhoff, who is staking its future on his vision of riches on the internet, has got it right.

Middelhoff: 'We are a home for artists and talent' SYGMA