German giant optimistic on Random buy; outlines November rollout of online retailing

The Bertelsmann group's performance was quite flat in the business year ending June 30, with consolidated sales of DM 22.9 billion representing a rise of only 2.4%, all of which confirmed earlier leaks and then an interview-confession, published in a German business weekly, by outgoing president and CEO Mark Wossner. But this is only part of the story. For if one adds the Bertelsmann share of the CLT-UFA joint venture in broadcasting, along with income from a partnership with AOL, total turnover actually rises a gratifying 14.7%, to DM 25.7 billion, with a 9.8% increase in net income to a record DM 1.122 billion. (For that business year, Bertelsmann's back office calculates the conversion at DM 1.78 to $1.)

And, of course, the figures do not include the recent acquisition of the Random House group -- neither the cash outlay nor the revenues -- and when that operation gets turned around, it is destined to be what Wossner calls the "crown jewel" of this global corporation. With Random, consolidated turnover will jump to DM 28 billion. But even without any help from the crown jewel, U.S. business is henceforth one of three equal pillars upon which the group rests, and today the U.S. edges out the two others (Germany, and the rest of Europe) by a decimal point-30.6%, to Germany's 30.5 and the rest of Europe's 30.4-and it has the highest growth rate.

This was the story unveiled to the world financial press, 132 strong, at the annual business year conference at group headquarters in Gutersloh, North Germany, September 23.

(New chief executive Thomas Middelhoff, who takes over from Mark Wossner at the end of October, flew to New York the following day for a press briefing on U.S. book results. U.S. revenues for the year were $976 million, from BDD and the clubs, and Middelhoff said that in 15 years the U.S. would be "far and away" the largest market. By next year, he added, books will be the largest part of the company, with total sales of about DM $9 billion. Peter Olson, Random CEO, said it was unlikely Bertelsmann would make any further large trade acquisitions in the U.S. but it might acquire certain properties and licenses. He d s not foresee any "extensive" layoffs in the amalgamation of BDD into Random House.)

PW's envoy in Gutersloh met Klaus Eierhoff, Middelhoff's young successor as president and CEO of the Bertelsmann Multimedia Group, for an advance look at launch plans for Books Online (BOL), Gutersloh's answer to Amazon.com, designed to be a "supplementary" sales channel alongside clubs and retail outlets. (BOL will be operated with partners whose names will be disclosed in the near future.) Service is set to begin in mid-November in the U.S., U.K., Germany, France, Spain and the Netherlands. Customers in each will receive country-specific information in their own languages. The operation will respect each country's legislation and conventions on discounting, while in territories such as the U.S., where markdowns are commonplace, "we'll discount to meet the competition." Eierhoff also revealed plans to develop alternative means to get people online (say, via specially equipped telephones or TV sets); in Germany, for example, only 30% of families are able to handle a PC.

Frank Wossner, chairman Mark's younger brother, and president and CEO of the Bertelsmann book corporation that will be responsible for the actual business operations of BOL, expects to see an "incredible" rise in e-commerce. Questioned about rumors that some book-club managers fear that BOL might cannibalize their customer base at a time when clubs are hardly in an expansive phase, Wossner told PW that the decision to go ahead with BOL was made by Bertelsmann clubs and publishers together. Online business will be only one of the group's channels for getting books to people, the others being clubs and -- where they exist -- Bertelsmann's own retail outlets.

Cannibalization is unlikely, according to Frank Wossner, since clubs offer clear advantages to their members, such as bonus books. Like Eierhoff, Frank Wossner is convinced that no competitor will be able to undersell BOL in countries with retail price maintenance; furthermore, no online competitor has the assets Bertelsmann can mobilize on the European continent, and it won't be worth their while to challenge the market leader.

In his own presentation to the press, retiring CEO Mark Wossner pointed to progress made during his watch, such as an average annual 10% growth in sales, and an increase of DM 100 million in profit each year (including the latest). Siegfried Luther, the group's chief financial officer, added that despite the general slowdown, cash flow was nearly as high as in the previous year, and debt was way down (to DM 262 million).

In "industrial" activity -- including printing, distribution and other book-trade services -- Bertelsmann is number one in Europe. Mark Wossner put in a good word for the American music business under BMG Entertainment, which now claims a 14% market share, although overall BMG results were held down by the Asian crisis. The retiring CEO pointed to what he saw as the three major achievements of his final years at the helm: purchase of the New York Times magazine group; the development of multimedia; and, of course, the takeover of Random House. He projected sales of DM 30 billion in 2000.

But the book business has been disappointing, with much of the shortfall due to slowed growth in the German and French club giants (in Germany alone, profits slid from DM 100 million to 50 million). But these problems have been tackled, Wossner added, and "we're going the right way." (One way will be to develop partnerships in Europe.) "Random House will have to be successful -- it will be successful." Responding to a question from the floor, book group president Frank Wossner stressed that globally, club membership has risen considerably, while the German decline was actually programmed (e.g., the music club business is being restructured because it turned out not to be such a good idea).

Among promising developments: the one-million-member Shanghai book club, and a joint venture in clubs with the Brazilian trade publisher Rocco. In a brief revelation of his own intentions, future CEO Middelhoff identified Asia as a priority for the next 15 years, to receive roughly similar attention and investment as the United States. But he also mentioned a $25-million capital venture fund created to assist start-ups, especially on the West Coast of the U.S.

In all, books brought in some DM 7.3 billion in 1997-98, amounting to 27% of total group revenues.