Bertelsmann AG



"The media market is changing at a technology-driven speed never before seen in our industry. We are active in markets today that did not exist at our last Management Congress in 1994; consider in particular the Internet. And we are confronted by competitors whom no one had ever heard of in 1994. Small fry are turning into sharks overnight!"

 – Thomas Middlehoff, Chairman and CEO of Bertelsmann AG, Speech “Continuity in Excellence”, October 28, 1998




As Thomas Middlehoff ended his speech on that memorable day in October, several questions hung in the air. Was that fear in his voice, or determination? Who were these competitors he was talking about, and could they really endanger the success of a giant the size of Bertelsmann? The management team at Bertelsmann was faced with the challenges of adapting to a new technology-driven environment while maintaining their number three position in the world of multimedia. All this while operating as a private company with a century-old culture.



History of Bertelsmann


Today, Bertelsmann AG is the world’s third largest media group, behind Time Warner and Walt Disney. In 1999, it generated revenues of US$14.2 billion from 600 companies in 50 countries, and employs close to 64,000 people. Its products cover virtually every kind of media and include books, magazines, newspapers, tapes, CDs, videos, TV, film, and online services. Bertelsmann also operates book and music clubs, and is vertically integrated through ownership of its own printing and paper production facilities.


Bertelsmann AG was founded in 1835 by Carl Bertelsmann, in Gutersloh, Germany. The company was founded as a religious publisher and printshop, producing religious literature and hymnals. Throughout the remainder of the century, Bertelsmann grew steadily, and expanded the title base to include literature, theology and popular fiction. The growth continued until the Second World War, when the publishing house was shut down by the Nazis, and the production facilities in Gutersloh were destroyed in an Allied bombing raid.


After the war, Reinhard Mohn, whose grandfather had married Carl Bertelsmann's granddaughter, returned to Germany. During the war he had been incarcerated in a POW camp in Kansas, and he returned to rebuild the publishing house. Bertelsmann resumed publishing in 1948, and expanded rapidly. The rapid rate of growth can be attributed to the establishment of a global network of book clubs starting in 1950 (when Bertelsmann started Lesering[1], Germany’s first book club) as well as music circles from 1958.


Bertelsmann also began to diversify its interests as part of its overall growth strategy. In 1964, it acquired UFA (a German TV and film production company), and bought a stake in publisher Gruner+Jahr (a publisher of newspaper and magazine titles). Bertelsmann also looked to global expansion through the purchase of 51% of US-based Bantam Books in 1977 (the remaining 49% was purchased in 1981) and the acquisition of Arista Records in 1979. Under CEO Mark Woessner, Bertelsmann’s US presence was further expanded in 1986 when they bought RCA Records and acquired a controlling stake in Doubleday Publishing, one of America’s largest publishing houses.


The peak of Bertelsmann’s acquisitive phase came in 1998. In that year, it paid US$200m for a 50% stake in online retailer, purchased the remaining 50% of Book Club Associates, Britain’s largest bookclub, and paid US$1.4 billion for U.S. publisher Random House. In the same year, Mark Woessner stepped down as CEO and took a position on the supervisory board of Bertelsmann, to be replaced by Thomas Middlehoff. Bertelsmann today is one of the most influential media companies in the world, and despite its size remains privately owned by descendants of its founder Carl Bertelsmann.



Core Businesses of Bertelsmann


Bertelsmann Book AG


Bertelsmann Book boasts many best-selling authors including John Updike, John Grisham, Danielle Steel and Toni Morrison. The largest share of Bertelsmannn’s revenues is generated by sales through Bertelsmann’s book club network worldwide, comprising 60% of total sales, followed by publishing (23%), professional information (10%), and direct sales (7%). Increased market share and revenue levels have been driven in part by the acquisition of Random House in 1988, which brought the largest number of Pulitzer and Booker prize winners, No.1 bestsellers and Nobel Laureates of any publishing house in the world. Sales of John Grisham’s novels alone comprise 6.6 million copies in 1998[2]. Book club membership growth is fueled both by repositioning of products (more non-fiction, more male oriented fiction) as well as the acquisition of professionally oriented niche clubs, which are expected to add 15% to the membership base. Book clubs are also being established in new markets including China, the Far East, and South America. New markets form an important source of growth for Bertelsmann. A weaker consumer demand in traditional markets in Europe forced Bertelsmann to develop new markets by continued innovation of its product lines and making their distribution networks more flexible.


The Professional Information segment is also expanding. This comprises information on construction and environment, medicine, transportation, science and technology, and entertainment. 60% is distributed in the form of magazines and information services, with 21% directly marketed to professional consumers. Bertelsmann is growing this sector through acquisition, acquiring the Springer Publishing Group, Germany's biggest professional publishing house. It expects this division to become a top global competitor within 5 years.


Gruner+Jahr AG


Gruner+Jahr, the newspaper and magazine publisher, distributes a wide range of titles not only in Germany, but throughout Europe and the U.S., with an expanding presence in Eastern Europe, Russia and China. Their title list includes daily newspapers like Berliner Zeitung and Sachsische Zeitung, and magazines including Stern and TV Today in Germany, Family Circle and McCalls in the US, Best and Prima in UK. Gruner+Jahr also publishes Cosmopolitan and Marie Claire in Spain. They are now targeting new markets, particularly the younger generation with innovative titles including Bizz, Online Today, and Geolino.


Outside the German market, strong growth has partly been achieved through strategic acquisition, including 75% of the News Group in Austria and the women’s magazine group of the New York Times Inc. In the UK, a price war has restricted growth of traditional titles, whilst Gruner+Jahr has seen success through marketing new titles including Prima Home and Prima Baby, targeted at a specific market segment. In new markets, Gruner+Jahr have launched Geo in Russia, and have formed a partnership with Shanghai Scientific to launch Car and Motor, in China, which is a new market for magazines.


The largest threat to the magazine business has been the migration of advertising dollars from magazines to TV. Despite higher costs, advertisers have been lured away by the wide reach of television. To some extent, however, Gruner+Jahr has been successful in retaining high profile advertisers through targeted promotions and more effective market research.


BMG Entertainment


BMG Entertainment is one of the top 5 music enterprises in the world. Its subsidiary, Sonopress, is the largest CD-ROM and second largest CD manufacturer worldwide. Its record labels include Arista Records and RCA Records, `and the company also publishes music through BMG Music Publishing. BMG is the home of some of the world’s top recording artists, with 20 selling more than one million copies in 1998, including Puff Daddy, Backstreet Boys, Natalie Imbruglia and Sarah McLachlan. With sales in excess of US$1.9 billion and a market share of 14.6%, BMG entertainment is the 2nd largest player in the North American Market. BMG is also the second largest distributor of recorded music overall, and the largest distributor of R&B records and all singles.


BMG is not just focused on North American artists. One of their strengths has been to develop local talent catering to local tastes, including Gotthard in Switzerland, So Pra Contrariar in Brazil (who has been successful throughout several Latin music markets), Eros Ramazzotti in Italy, and Andy Lau in Hong Kong.


The Sonopress CD and CD-ROM business is contributing significantly to BMG’s bottom line. The company has pioneered the launch of DVD in Europe and US, as well as the first producer of DVD 9, the most technologically advanced DVD with 8.5 gigabytes of storage capacity. DVD is a strong growth business, and this has been coupled with strong demand for multimedia CDs (games and software) making Sonopress the largest player in this market.


CLT-UFA Radio, film and television


CLT-UFA stemmed from the merger between Luxembourg’s CLT and Bertelsmann’s UFA, and is the market leader in Europe’s radio and television industry. The merger has allowed integration of a complementary strategy to attract the widest possible demographic in the European market. In Europe, 120 million viewers watch one of CLT-UFA’s 22 channels every day.[3] Channels include RTL, RTLII and Super RTL in Germany, Channel 5 in UK, RTL 4 in the Netherlands, RTL KLUB in Hungary and RTL 7 in Poland. Programming covers all interest areas and age groups, and includes fiction, news programming, cultural events and sports. CLT-UFA is penetrating new markets, by establishing pay TV (Premiere in Germany) and digital satellite services (TPS gained 345,00 subscribers in Germany in the first year, twice original projections).


In addition to Radio and television, CLT-UFA is also one of the leading production companies, producing 900 hours per year, including feature films, documentaries, television plays and series for the German market.



Changes in Competitive Landscape



As Bertelsmann enters the twenty-first century, its book business is well positioned to use emerging technology as a tool to expand and enhance its products and services. In particular, Bertelsmann management has embraced three new forms of technology that are giving them an advantage over competitors who hesitate: the digitization of books, print-on-demand publishing and Internet sales.


Electronic Books

While skepticism exists as to whether people will really curl up with a book online, Bertelsmann isn’t taking any chances. With the 1998 purchase of giant U.S. publisher Random House Inc., Bertelsmann became the largest book publisher in the world. It was at about the same time that they decided to lead the industry with the digitization of books. They began to store books on electronic files. The conversion of 20,000 books on Random’s backlist from paper to digital is currently underway. By converting the books to a digital format, Bertelsmann enters a market that is yet uncharted. “As the market develops, the definition of a book is evolving into an exotic collection of literary hybrids – electronic titles that can be read as e-mail, retrieved by a portable electronic reading device, downloaded to a computer or converted quickly from digital versions into bound copies that can be printed in less than 30 seconds”.[4]


With the emergence of this new technology, the opportunity for making money grows: subscription rates or user fees for end-consumers, author fees and royalties that could last into perpetuity, and the sale of digital collections to libraries and universities are new potential sources of revenue. Equally inviting are the cost savings associated with electronic books. The cost of manufacturing (especially the cost of paper), storing and shipping books is drastically reduced.


Complementary products in the form of hardware and software are in development at other companies. NuvoMedia’s Rocket eBook is a stylish hand-held device that weighs 22 ounces and stores more text than you’d want to carry with you in paper form (about 10 books worth). Softbook by Softbook Press Inc. and the Millennium Reader by Librius Inc. are two other devices currently available. Glassbook Inc, with a recent infusion of money from Hewlett-Packard, is a maker of software that re-creates the text to look just like the book itself. They are competing with Microsoft’s Reader software, which claims to sharpen the image of text on color monitors.


But despite the furor in the industry, sales of electronic books are not encouraging. At Simon & Schuster, a Bertelsmann competitor, e-book sales currently represent only one tenth of one percent of total book sales. And the optimism of publishers with respect to future growth is clouded by facts surrounding the largest segment of the market. “…Some publishing experts doubt that changes will come rapidly, given the demographics of the American book market. The most reliable and free-spending group of book purchasers was raised on paper and they are edging into their mid-40’s and up.”[5] In addition to the uncertainty of success in this market is the question of how to retain control of the sale of books once they are in digital form. “…The crucial issue of copyright protection remains unresolved. Without some form of encryption to prevent pirating, copies of e-books can be run off by the thousand.”[6]  While Bertelsmann fights for supremacy in this new market, the challenges they face keep adding up.



Building on the work being performed in the area of electronic books is another new technology that uses electronic files. Bertelsmann and Xerox recently formed a joint venture to develop the technology to print books in small runs. Because the books are stored in files electronically, they can be printed at anytime in response to an order. The intent is to introduce the system for use throughout Bertelsmann’s publishing entities on a global basis. “Print-on-demand technology allows publishers to print small numbers of niche titles or out-of-print books whenever an order is received. Using traditional processes, printing less than 1,000 books isn’t economically viable. The move makes it easier for consumers to find rare books and cuts down on storage costs for publishers.”[7]


By pushing the development of new technologies like print-on-demand, Bertelsmann is adding value to its operations at multiple stages. As publishers, they are reducing risk and increasing flexibility of the books they can offer; as distributors they are reducing inventory costs and the cost of returns from unsold books; and as direct marketers they are providing customers with more selection and faster, better service.


But the move to print-on-demand systems has lured a host of new competitors that are trying to carve out their place in niche markets. Softbook Press, Mind’s Eye Fiction, R.R. Donnelley and Librius Inc. are a few of the companies that are taking on the new title of e-book publishers. Even incumbents, like Ingram Book Group, a major distributor in the United States, are offering a similar service. Ingram owns Lightning Print, a printer that targets publishers of academic books. In April 1999, Lightning Print introduced their drop-ship service, which utilizes a print-on-demand system, and allows publishers to offer universities and other academic institutions the freedom to place any size order.


The Internet

In 1995, Bertelsmann formed a joint venture with AOL to create AOL Europe. They also currently own 41% of (reduced from their original 50% prior to the IPO), their own site, and stakes in about 110 other commercial Web sites and search engines.[8] In August 1999, they launched an online auction business called AndSold. With such a presence online, Bertelsmann’s direct access to customers is soaring. The main impediment to sales, ironically, is not their agility in getting online, but rather their customers’.


When Bertelsmann invested in these new e-businesses, the expectation was that European customers would catch Internet fever, and sales would mushroom. provided a mouth-watering model of how well books could sell in cyberspace. U.S. households were already spending US$18.2 billion shopping online in 1999 and US$1.2 billion, or 6.4% of that total, was spent solely on books. Even more promising was that book sales over the Internet, at least in the U.S., were predicted to grow to 18% of total book sales by 2003 (see Exhibit 5).


But customers in Europe have still not caught up to the level of activity of U.S. customers. The combination of high dial-up charges and the price of PCs in Europe have deterred people from using the Internet. This has prompted some Internet providers, including AOL UK, a unit of AOL Europe, to cut their calling rates.  If that is not enough, it has also driven Bertelsmann to consider subsidizing PCs to coax people online. “AOL Europe…is negotiating with Fujitsu Siemens Computers BV to provide subsidized computers in Germany, Britain and possibly other countries. German customers probably would receive a Fujitsu PC if they signed up for AOL for three years and paid 50 marks a month…”[9].


Bertelsmann is fully committed to integrating the Internet into its business. Without a higher volume of customers online, however, and mounting expenses to get them there, will profitability suffer as a result of an early, aggressive strategy?





Publishers stand at crossroads today in front of oncoming Internet traffic. But there is still a central role to be played by journals, magazines and other publications in the emerging digital marketplace. This role will be the one that will amplify media asset values for culturally dynamic publishers who carry credible media brands.


Though the fundamentals of most publishers remain intact, it would be unwise to ignore the changes in the present environment. The Web could eliminate the barrier of distribution costs for news media. In addition, it could open new media by enabling cross-media promotion and introducing new revenue streams.


Authoring a digital media future

There is no doubt that the digital era will be selective. Those magazines and journals that can maintain their rank among the strongest local, national and worldwide media brand names will be the ones to prevail.  But they will need to adapt themselves to different cultures and accept alternative ways to leverage their quality.


Innovative management will play a key role investing capital and talent, trying to reshape corporate culture to face the flexibility and the inevitable competitive change imparted by the Web.


Two evolving frameworks for the digital epoch are emerging:

·         the “local portal” model;  and

·         the “community media” model


Under the “local portal” model, the unique qualities of publications like newspapers, including brand name and local interest stories, are repositioned to the Web. By doing so, publishers provide marketers access to a number of consumers who are not yet print edition readers. Furthermore, for publishers it leverages the sunk cost of the printing edition across a broader revenue base. The key to success is to offer an extremely reliable information service and to broaden the operating scale by stringing together a network of many local portals. An example of this leverage was Knight Ridder’s Real Cities that augmented their local portals with news footage in partnership with broadcasters.


Figure 1 – Local portal schematic













On the other hand, the “community media” model pursues a more sophisticated media-marketing goal. The first step under this model is to choose an existing journal or magazine that represents the print “incarnation” of what is truth in a community of readers interested in a particular topic. The printing magazine or journal satisfies that community through print; a cable network addressing the topic could also serve those same consumers; as could a Web site. The cross-promotional concept of “community media” brands interest in the “common interest” consumer category. Then each media incarnation of brand, be it the magazine, the journal, the cable network or Web site, steers consumers to the other. This reinforces the awareness through brand extensions and cross-promotion in multiple media, not cannibalizing each other but cross-fertilizing them. The key in this model is to retain interested consumers in a loop of media wherever they may be located. “Community media” asset value is then extracted by tooling consumers through whatever revenue benefits the medium, be it advertising, subscriptions or e-commerce.


Figure 2 - Category media Website

















Competitors into action

E.W. Scripps (SSP) is one of the publishing companies that stands at this crossroad, trying to manage the transformation from a newspaper publisher into an integrated multimedia entity leveraging its resources and content across a broad digital platform.


Scripps's vision is to create local Web portals that will be responsible for combining both local news and information from traditional broadcast TV stations and newspapers with special-interest consumer content category television. Their strategy is to target a broader advertising base by enhancing local audience share in strategically targeted regions. By doing so, Scripps is building a premier national brand franchise combining its cable networks television programming with the Web.




New Trends in the Music Industry: Digital Downloadable Music

For the past years, music has been distributed through three main types of medium: compact discs (CD), tapes, and records. Because of its sound performance and its intrinsic practicability, the CD has become the industry leader medium. Digital technology is used to translate music partitions into binary sequences, which are then engraved onto the CD.


With the increase of the Internet’s use, a new medium has appeared: digital downloadable music (DDM). This medium enables a user to download music from Internet sites to his or her computer. It is an audio compression format for encoding music on a computer[10]. Several formats are currently used on the Internet: MP3, MS Audio 4.0, Liquid Audio and A2b music are among the most popular. The industry leader appears to be the MP3 format. Forrester Research estimates that 50 million of Internet users use the MP3 format to download music on their computer.


Today, the listening quality of DDM does not reach that of CDs. Furthermore, only a handful of products exist through which one can listen to MP3 files outside a computer. One of the leading products is the Rio player manufactured by Diamond Multimedia, which retails below US$200. The industry expects to sell between one and two million new players before the end of the year[11].


The time required to download songs is another very important barrier to adoption. Forrester Research estimates that, using current technology, to download a 12 songs album would require between 5 to 10 hours depending on the speed of the users’ modem. Finally, this new medium makes piracy very easy.  No industry standard has been determined, nor have artists' rights been agreed to.


On the other hand, this technology is very recent and more and more companies are working on improving this medium to achieve CD sound quality and provide portable playback devices. Companies such as Thomson RCA, Samsung or Sony are expected to launch new devices by the end of 2000. According to Joanne Marino, publisher of the Internet trade magazine WebNoize, “Everybody is underestimating how quickly customers are figuring this (DDM) out. Their primary market is youth, and the speed of adoption is tremendous.”[12]


DDM poses several challenges for Bertelsmann.  Should they try to hold their grip on existing technology? Or should they team up with others to develop the new technology and support the complementary products?


Changes in customer and supplier behavior

Bertelsmann's current music business model is based on the capacity to attract and find talented artists and distribute their albums on a worldwide basis. Because of the importance of the distribution channel in this industry, large labels such as BMG, RCA, Sony Music or EMI are considered to have a very important bargaining power over artists. To be distributed and to have access to radio or television, an artist is usually forced to sign with a major label. Some independent labels survive, but they usually target their products to niche audiences.


The Internet has challenged and changed this business model and the industry structure. It is a cheap distribution channel that reaches millions of people. Furthermore, it created a new kind of independent label: the Internet Independent Label.


The Internet as a new distribution channel

The Internet has already proven to be a very efficient and successful distribution channel. Customers use the Internet more and more to buy goods and services. According to Forrester Research, the sales of CDs and tapes on the Internet will increase from US$50 million in 1997 to US$4.03 billion in 2002 worldwide. Furthermore, the report estimates that, in 2002, the Internet sales of CD will account for 28.2% of the entire market. The development of Internet superstores is already on the way. Music Boulevard or CDNow are estimated to offer over 300,000 titles by 2000[13]. These companies sell millions of CDs each year. However, Bertelsmann's presence in this distribution channel is not even virtual.


The Internet Independent Labels

As mentioned, the six major labels (Universal Music Group, Warner Music Group, BMG Entertainment, Sony Music Entertainment and EMI Music) have benefited over time from a strong bargaining power over artists. These major labels vertically integrated their operations to increase their presence in the distribution of music: they control distribution channels (stores), manufacturing process (CD burning) as well as media (radio, newspaper and television). Their main advantage relied in their capacity to reach a very large audience efficiently and at a low cost. Independent labels have only been able to compete on a niche level. The principal barrier to entry was the cost to access large audiences.


The Internet changed this oligopoly. A growing number of independent artists and label are on the Internet. The Internet offers them a huge audience at a very low price. A label can launch a dedicated Web site for less than US$10,000. An artist can create its Web site for free on GeoCities and provide downloadable songs. For instance, according to Gerry Kearby, CEO of Liquid Audio, “More than 1,300 musicians, 300 recorded labels and 200 music Web sites are using Liquid Audio to promote and sell music through the Liquid Music Network.”[14] The community of Internet independent artists and labels is growing tremendously.


Furthermore, independent artists and labels can leverage the high sense of community that there is on the Web to promote artists to targeted audiences. As a result of these changes, Forrester Research estimates that by 2002, the sales of independent artists and labels on the Internet will reach US$1.3 billion. The impact of these new labels and artists on Bertelsmann’s capacity to sustain its growth is significant to the company’s future.




The biggest challenge that CLT-UFA will face over the next few years is the convergence of television, computers and the Internet. But until convergence becomes reality, CLT-UFA faces the technological challenge of moving from today's analog television technology to digital television, what in turn will enable full convergence of television, computers and the Internet.


CTL-UFA already produces part of its shows using digital technology, yet only one (Premiere, 1.6 million subscribers[15]) of its 22 television stations actually broadcasts digitally. While digital technology has many advantages for the consumer (see below), it is not clear yet how quickly consumers will adopt it. In addition, upgrading the current analog network will require investments of about US$300 per outlet.[16]


The new transmission technology, the emergence of new consumer electronics (CE), the new home entertainment user interfaces (HEUI) and the Internet will fundamentally change established programming practices, business strategies and regulatory requirements, including the public interest obligations that have long been considered fundamental to broadcast television. [17]


Market changes, new trends: From analog to digital television

The current analog television system has been in place since to creation of television, 50 years ago. The changes and advances in television technology have been minimal from today's perspective. The main changes have been the introduction of color images, stereo sound, remote control, cable channels, closed captioning, and parental control features.


The technological development of television has lagged behind the development of other technologies. Even though television had some serious shortcomings such as limited resolution and color rendition as well as problems with "ghosts" and interference from other radio sources, no fundamental innovation took place in the industry.


The considerable complexity of changing from analog to digital and the extensive infrastructure upgrades required prompted the American Federal Communications Commission (FCC) to take the leadership role in this project. After 10 years of wide-ranging tests and hearings, the FCC proposed legislation specifying the basic terms under which digital television had move forward, today known as the Telecommunications Act of 1996.


The move from analog to digital television can be compared to the move from vinyl records to compact disc. The new technology will allow a much broader application for television. Multiple advantages are associated with the introduction of digital television:


·         wider screen and higher resolution also known as High Definition Television (HDTV)

·         significantly better color rendition

·         backwards compatibility to transmit standard definition television

·         one single TV channel to carry multiple programs simultaneously, permitting TV stations to air two or more shows simultaneously

·         better sound and multiple soundtracks per transmission allowing, for example, a movie to be broadcasted in multiple languages and have the consumer chose the preferred language

·         reduced or eliminated interference by ghosting (lines across screen), caused by atmospheric conditions or by other appliances in the household


In addition to better quality television, digital transmission allows networks and cable companies to transmit not only video signals, but also audio, data and voice. Broadcasting companies will be able to supply consumers with a broader array of services, which can be store in zeros and ones.[18]


Digital broadcasting quadruples the numbers of channels that can be transmitted simultaneously, significantly increasing the number of program transmitted. In addition, digitization will allow user to program their own schedules, circumventing up to 9 minutes of ads per hour, and further reducing the control by TV stations. Digitization will reduce transmission costs and provide additional customer value by increasing the choice to the consumer (multiple languages, additional textual information to the running program), and adding new services like video-on-demand or pay-per-view.[19]





Thomas Middlehoff and his management team face many challenges as the new millennium approaches. Was Bertelsmann’s 1998 flurry of acquisitions too aggressive in an industry where uncertainty seemed only surpassed by increased competition? Or had they not grown aggressively enough to capture the opportunities that new technology was presenting? Books, publishing, music and TV/Entertainment all pose unique questions that await answers in the coming century.



Exhibit 1: Historical Financials & Number of Employees


Year                Rev. (US$ MM)               NI (US$ MM)                       Net Margin             Employees

1999                        14,164.8                                  495.8                                       3.5%                       64,937

1998                        12,701.5                                  620.7                                       4.9%                       57,807

1997                        12,859.7                                  584.6                                       4.5%                       57,173

1996                        14,126.2                                  593.8                                       4.2%                       57,996

1995                        14,888.8                                  591.8                                       4.0%                       57,397

1994                        11,589.3                                  477.9                                       4.1%                       51,767

1993                        10,049.8                                  387.5                                       3.9%                       50,437

1992                        10,469.2                                  373.4                                       3.6%                       48,781

1991                          7,984.9                                  297.7                                       3.7%                       45,110

1990                          7,992.0                                  306.2                                       3.8%                       43,509


Source: Hoovers Online, Bertelsmann Company Profile



Exhibit 2: Sales by Geographic Region


                                                                    1998 Sales

                                              US$ MM                       % of total


Germany                    3,880                           31

Other                           3,853                           30

US                                                3,880                           31

Other                                           1,089                              8


Total                                         12,702


Source: Hoovers Online, Bertelsmann Company Profile



Exhibit 3: Sales by Products/Operations


                                                                    1998 Sales

                                              US$ MM                       % of total

BMG Entertainment               4,377                           33

Book                                            4,010                           30

Gruner+Jahr                             2,838                           22

Bertelsmann Industry            1,864                           14

Multimedia                                  173                              1

Adjustment                                (560)


Total                                         12,702




Source: Hoovers Online, Bertelsmann Company Profile



Exhibit 4: Bertelsmann Organization Structure


Bertelsmann AG

Bertelsmann Foundation 68.8%

Mohn Family 20.5%

Zeit Foundation 10.7%









Random House Inc                                    Arista Records                                         RTL Television (89%)                           Family Circle

Bertelsmann Verlag                                    RCA Records                                            RTL II (33%)                                           McCalls

Berlin Verlag                                               RCA Red Seal                                           SuperRTL (50%)                                     YM

Wolf Jobst Siedler                                     Windham Hill Grp.                                   Veronica (64.2%)                                    Parents

Goldman Verlag                                          BMG Ariola                                               RTL TV1 (66%)                                       Prima/Best

Plaza & Janes                                              BMG Japan                                               Channel 5 (29%)                                     Geo

Editorial Sudamericana                              BMG Ricordi                                             RTL Radio                                               Berliner Zeitung

Der Club                                                      BMG Direct                                               BMG Video                                             Tele-Loisirs

France Loisirs                                             BMG Music Publishing                          UFA Sports                                             Top Girl

Doubleday Direct                                       BMG Songs                                              UFA Film &TV Prod.                             (many others)


                                                                      BMG Online


By Activity


Clubs 53%                                                   N/A                                                            TV 74%                                                    Printing 18%

General Interest 42%                                                                                                     Radio 8%                                                 Sales 33%

Direct Sales 5%                                                                                                              Production 16%                                      Advertising 40%




Source: Bertelsmann Annual Report 1997/98




Exhibit 5: US Online Retail Projections


                                                   1999               2000               2001               2002               2003           % of total

                                                                                                                                                                      2003 retail

Total US Revenue             18,152           33,029           52,244           76,269         108,031                  6%

(US$ MM)


Media                                     2,988              4,655              6,658              8,514           10,002                19%

Ø              Software             1,147              1,720              2,408              2,890              3,179                25%

Ø              Books                  1,166              1,749              2,274              2,729              3,002                18%

Ø              Music                     374                 711              1,279              1,919             2,495                20%

Ø              Videos                    301                 475                 697                 976              1,346                12%


Total Convenience              5,563              9,628           15,275           22,629           32,294                  6%

Event Tickets                           238                476                 952              1,714              2,572                19%

Apparel                                  1,340              2,843              4,977              8,328           13,510                  4%

Gifts & Flowers                       563                 810              1,062              1,377              1,770                  6%

Recreation                                434                 844              1,626              2,696              4,420                  4%




                                                   1999               2000               2001               2002               2003


US households online         33.5                38.3                43.5                48.6                52.8



US households online         13.1                17.7                23.1                30.3                40.3

shopping (US$ MM)


Avg. household US$          1,385              1,864              2,259              2,518              2,678

spent online p.a.




Source: Forrester Research



Exhibit 6: Publishers



Random House

Random House, Inc. was founded in l925, when Bennett Cerf and Donald Klopfer purchased The Modern Library, reprints of classic works of literature from publisher Horace Liveright. Two years later, in 1927, they decided to broaden their publishing activities, and the Random House colophon made its debut.

Random House first made international news by successfully defending in court the U.S. publication of James Joyce's masterpiece, Ulysses, setting a major legal precedent for freedom of speech. Beginning in the 1930s, the company moved into publishing for children, and over the years has become a leader in the field


During the next decades, Random House went through a several acquisitions and was acquired itself a couple of times expanding its capabilities as a publisher. In 1998 Bertelsmann acquired Random House and greatly expanded the company, bringing together the imprints of the former Random House with those of the former Bantam Doubleday Dell.


Random House provides a broad range of publications from Dr. Seuss to Anne Rice and today is the world's largest English-language trade book publisher. Random House publishes hardbacks, trade and mass-market paperbacks, multimedia products, and other format books.


Random House Publishers:

·         Random House Trade Publishing (including flagship imprint Random House Adult Trade Books),

·         Knopf: fiction and nonfiction novels

·         Ballantine: paperbacks novels , sci-fi, collectors' guides;

·         Random House Children's Publishing ;

·         Crown Publishing Group : illustrated, New Age, reprints;

·         Fodor's Travel Publications;

·         Bantam Doubleday Dell (now Bantam Dell).





Exhibit 7: Acquisitions in the Publishing Industry



Random House, Inc.

Springer Publishing Group


·         # 1 in English book publishing

·         43% share of US-bestsellers (hardcover)

·         30% of US-bestsellers (paperback)

·         more tan 1 m book delivers per day

·         more than 100 # 1 titles on the Sunday Times Bestseller List



·         # 1 in Germany together with Bertelsmann professional information

·         more than 500 journals, 2,000 books p.a.

·         more than 120 Nobel laureates

·         400 online journals on the Web





Source: Bertelsmann Annual Report 1997/98



Exhibit 8: Digital Downloadable Music Competitors (, Inc. was incorporated in Delaware in March 1998. is pioneering a revolutionary approach to the promotion and distribution of music. The company's Web site has grown into a premier online music destination. The company uses the Internet and file formats that make music files smaller to enable a growing number of artists to distribute and promote their music to a broad audience and to let consumers conveniently access this expanding music catalogue. MP3's Web site contains more than 208,000 songs from over 35,000 artists, representing what the company believes to be one of the largest collections of digital music available on the Internet. Consumers can search, preview and download music free of charge.



Liquid Audio (

Liquid Audio was formed in January 1996. The founding team worked together to develop and build a leading company in the digital audio workstation market. The company received its first outside round of financing in May 1996. Hummer Winblad Venture Partners led this round. The company and its products were launched to the public at the Audio Engineering Society convention in November 1996.


Liquid Audio is a leading provider of services and software that enable musicians, record labels and music retailers to digitally-deliver professional-quality music via the Internet. Formed by veterans of the music industry and professional recording engineers, Liquid Audio is leading the convergence of music and technology to establish the Internet as a new medium for music distribution. The company's products and services are based on an open architecture that supports many leading digital music formats, including Dolby AC3, AAC, and MP3. This open architecture will also enable Liquid System products to be compliant with the goals of the Record Industry Association of America's Secure Digital Music Initiative (SDMI).






Source: Company Websites


Exhibit 9: Internet Music Distributors (

Frustrated by his search for Miles Davis records, Jason Olim decided to create an online store that served a wide range of musical tastes. With his brother, Matthew, he launched CDNow in 1994, in step with the Web's dynamic growth.


In 1997 CDNow began its Cosmic Credit program, which provides hyperlinks to its sites from tens of thousands of fan sites devoted to musical artists (the fan sites get commissions). Also that year the company received a US$10 million cash infusion from private investors. As traditional retailers got in the online sales game, CDNow launched a huge ad campaign to boost its name recognition.


CDNow went public in February 1998. That June it bought custom-CD seller superSonic BOOM. The company created CDNow Europe in August 1998 to serve more than 35 countries.



Music Boulevard (N2K)

N2K dated back to the 1984 founding of Telebase, which provided online information retrieval services. Its EasyNet service offered access to hundreds of business and reference databases. Telebase expanded to music-related services in 1994 and created Music Boulevard the next year. In 1996 it merged with N2K (short for Need To Know), an online entertainment developer founded by Larry Rosen and Grammy-winning composer/musician Dave Grusin in February 1995.


Also in 1996 N2K hired producer Phil Ramone to create a music label, N2K Encoded Music, that would produce double-duty discs playable on CD-ROMs and audio players. The company sold its information services arm in August 1997 and went public that October.


New York City-based N2K operates a network of music Web sites, led by Music Boulevard that offers CDs and cassettes, audio samples, and music reviews. Its 1998 annual sales were US$42 million. is the first and largest custom compilation and secure digital download music site on the Internet. The company offers customers the possibility to build their own CDs by selecting and organizing songs from a library of more than 150,000 tracks from over 100 labels in a variety of music genres. CDs include up to 20 tracks or 70 minutes of music and can be personalized with unique labels as well as imprints on the jewel boxes.  CDs range from US$9.95 to US$24.95 and are shipped within two business days.






Source:  Hoovers Online, Company Profiles

                Company Websites

[1] German for "Reading Circle"

[2] Bertelsmann Annual Report, 1997/98

[3] Bertelsmann Annual Report 1997/98

[4] “Racing to Convert Books to Bytes”, Doreen Carvajal, The New York Times, December 9, 1999

[5]  Ibid.

[6] “Business: In a blind”, Anonymous, The Economist, October 2, 1999

[7] “Bertelsmann, Xerox Planning New System To Print on Demand”, Wall Street Journal, October 14, 1999

[8] See Bertelsmann AG – Hoovers Online: Bertelsmann: Company Profile

[9] “AOL Unit, Others May Subsidize Cost of PCs in Europe”, Neal E. Boudette, Wall Street Journal, October 27, 1999

[10] Goldman Sachs Investment Research

[11] The San Francisco Chronicle, August 1999

[12] The San Francisco Chronicle, August 1999

[13] "Music's Internet Era", The Forrester Report, January 1998

[14] Business Wire, June 1999

[15] Bertelsmann Annual Report 1997/98

[16] "Ein Liebhaber Preis", Tages-Anzeiger, December 14, 1999

[17] "The Origins and Future Prospects of Digital Television", National Telecommunications and Information Administration,, November 1998

[18] "Digital Television Consumer Information", Federal Communications Commission, November 1998

[19] "A New Era for European TV", The McKinsey Quarterly, Number 3, 1997