Random House Parent Wages Global E-Commerce Turf War
There is a special place on Thomas Middelhoff’s atlas of corporate geography that he likes to call “Bertelsmann Valley.” You might think of it as Silicon Valley stretched to a global scale and populated with scenic villages of dot-com shops, a few stray Holstein cows, and a couple billion dollars in strategically seeded venture capital. Or as Middelhoff, whom everyone knows as the chief executive of the world’s third-largest media conglomerate, describes it in company literature, Bertelsmann Valley is a “global innovation factory” turning German venture capital and corporate synergies into bang-up business plans to power the next wave of e-commerce.
Whichever metaphor you prefer, Random House, Inc. is looming ever larger as a prime piece of real estate in Bertelsmann’s e-commerce portfolio. With stakes in custom e-publisher Xlibris and digital audio retailer Audible via Random House Ventures, Random’s e-investment subsidiary, it’s clear that Random’s stockpile of digitized content will prove instrumental as Bertelsmann gears up for a global digital turf war against AOL Time Warner and CBS Viacom. And with more than $10 billion in Bertelsmann coffers primed for acquisitions and other investments — cash mostly derived from the sale of Bertelsmann’s stakes in AOL Europe and AOL Australia to America Online — the strategic alliances between the company’s publishing and e-commerce holdings are being closely watched by competitors on all fronts.
“In the decentralized organization of the Bertelsmann group,” Middelhoff told a recent conference in Berlin, “the new magic words are: stronger cooperation and intensive networking between the autonomous product lines and companies.” Shortly after that statement was made, the Bertelsmann e-Commerce Group (BeCG) was rolled out, forging a unified front of Internet, mobile, and broadband properties including bn.com (in which Bertelsmann has a 40% stake) and bol.com, which operates in 14 countries (including Japan, which the company notes is the second-largest book market in the world, devouring 1.5 billion books a year) and is soon to open in China, Korea, and Italy. Headed by Andreas Schmidt, who was recruited from AOL Europe, the BeCG mandate is to drive content — from books to magazines to compact discs — to wired consumers. “In the near future, we believe all content will be digitized,” Schmidt tells PT via e-mail, “and our aim is to put the products Bertelsmann produces — music, books, movies, and television — into digital form and distribute them across the Internet.” That may be the party line, but there’s more “intensive networking” to come. Middelhoff told the Financial Times Deutschland that he expects to bundle all Bertelsmann e-commerce under a single brand in the next three months. The long-term goal, Middelhoff said, was the digital distribution of books and music to a worldwide “content community” via a single brand network that could include bn.com and the Bertelsmann joint venture GetMusic. And all that commerce can be conducted with help from Bertelsmann’s digital rights management unit, Digital World Services.
For the moment, though, books are on the Bertelsmann Valley back forty. Major hits in the US have targeted the music and magazine segments, as in the acquisition of CDNow for $117 million. Bertelsmann’s magazine and newspaper unit Gruner + Jahr, meanwhile, dumped its UK holdings last month to focus on targets in the US, including the acquisition of Inc. magazine for $200 million. G + J USA CEO Daniel Brewster is also said to be in hot pursuit of the Times Mirror magazine group, a prize that would put content from such titles as Field & Stream and Popular Science at Bertelsmann’s e-commerce disposal.
On the portal front, much ado was made in May over Bertelsmann’s participation in the Terra Lycos deal, in which Spain’s Terra Networks gobbled up the portal Lycos for $12.5 billion, with Bertelsmann planning to pitch in $1 billion in advertising over the next five years. But the deal’s rationale involves a broader strategy to combine Terra’s data lines with Lycos’s portals, and funnel Bertelsmann’s content over both of them to the 50 million people in 37 countries who visit the Terra and Lycos sites each day. In fact, thanks to strategic alliances with AOL, Terra Lycos, and other portals, Bertelsmann has direct access to 200 million customers, in addition to the 50 million people already in the Bertelsmann database, including its book clubs. And on that note, all Bertelsmann clubs have been folded under one “direct-to-customer” umbrella to consolidate cross-divisional networking. BookSpan, a joint venture with Time Warner’s Book-of-the-Month Club and Bertelsmann’s Doubleday Direct, has only heightened convergence in clubland, while company insiders suspect an imminent bid for Reader’s Digest. Then again, what media property hasn’t had a rumored Bertelsmann bid?
A spokesperson declined to discuss Bertelsmann’s publishing holdings. But the most recent figures show that those holdings derive close to 70% of their revenues in North America, while 34% of Bertelsmann’s total revenues in the last fiscal year were generated in the US. Accordingly, few were surprised when Bertelsmann made Random House ground zero for the company’s worldwide book business, with Peter Olson at the helm. And that just means more fun for Richard Sarnoff, president of Random House Ventures. Look for more deals à la Audible, which created the Random House Audible imprint to produce spoken word content for digital distribution, with titles sold on the web by Audible.com (which has an exclusive deal with Amazon).
As the titans duke it out for e-market share, don’t forget Bertelsmann Ventures, a venture capital fund with offices in Santa Barbara, New York, and Hamburg, which recently closed a $250 million round of venture-ready capital. And Bertelsmann controls a venture capital fund for e-commerce companies via its e-Commerce Group. As Middelhoff told the European press, it’s “only the beginning.” That much, at least, is certain.