Bertelsmann A.G.

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Bertelsmann A.G.

Carl-Bertelsmann-Strasse 270
D-33311 Gutersloh
Germany
Telephone: +49-52-41-80-0
Fax: +49-52-41-751-66
Web site:http://www.bertelsmann.com

Private Company
Incorporated: 1835 as Bertelsmann Verlag
Employees: 82,200
Sales: EUR 20.04 billion (2001)
NAIC: 511130 Book Publishers; 334612 Prerecorded Compact Disc (Except Software), Tape, and Record Production; 511120 Periodical Publishers

Bertelsmann A.G. is one of the world’s largest media conglomerates, encompassing subsidiaries that span music, broadcasting, print, and the Internet. With operations in 60 countries, primarily in Europe and North America, Bertelsmann is active in these main areas: magazine and newspaper publishing; book publishing; book and music clubs; entertainment businesses in music, television, and multimedia; media e-commerce; and industrial businesses in printing, paper production, and other media-related fields. Among its several hundred worldwide subsidiaries, the best-known operations include Gruner + Jahr, publisher of magazines in Europe and the United States; Random House, Inc., the world’s largest book and publishing company; and such record labels as RCA Music Group, Arista, BMG Ariola, and BMG Japan, which jointly make up BMG.

19th Century Origins

The company was founded as a family business in the middle of the 19th century and had already grown to a considerable size before World War II. The significant expansion phase of the company, however, only began after the German currency reform of 1948, when Reinhard Mohn succeeded with the Bertelsmann book club (the Lesering) in introducing a revolutionary form of direct sales to the traditional German publishing market. Bertelsmann grew into an international force on the back of this great success. In 2001, 17.3 percent of Bertelsmann’s share capital was in the hands of the Mohn family; 25.1 percent was held by Belgian financier Albert Frere’s Groupe Bruxelles Lambert; and 57.6 percent of the capital stock was held by the Bertelsmann Foundation, established in 1977 by Reinhard Mohn with the intention to take over the Mohn family’s share in Bertelsmann and appoint the company’s management.

Although a multiple media giant by the turn of the 21^stcentury, the company began in 1835 as a small publisher of evangelical hymn books and devotional pamphlets in Pietist eastern Westphalia, where its headquarters have remained, resisting any suggestions of transferring to Hamburg or Munich. The founder of the company was Carl Bertelsmann, who was born in Gütersloh in 1791, two years after the French Revolution. His father died before he was two years old. His mother was to find him an apprenticeship in a bookbinder’s business as she had done for his elder brother. However, to avoid conscription into Napoleon’s Russian army, Carl Bertelsmann went traveling along the route from Berlin to Upper Silesia. After Napoleon’s defeat and exile, Carl Bertelsmann returned to his hometown in 1815, then upon his brother’s death in 1819, was able to set up his own bookbinder shop in his hometown.

“The little Bertelsmann from Gütersloh,” as he was known in the area, soon found a place in the Pietist movement that shaped the eastern Westphalian community, and discovered that it particularly needed hymnbooks for its services. Gradually Bertelsmann’s bookbinding business became a book-printing business as well, and then developed into a full publishing house. Bertelsmann dedicated himself to working industriously for his company, which, while small, expanded rapidly. By the time of his death, it employed 14 people.

When Carl Bertelsmann died in 1850, he left behind a wife and son and a considerable fortune. He had laid the foundations for the company’s subsequent development, but he was not there to witness the success of the firm’s bestseller, the Mission-sharfe (Missionary Harp), a hymnbook of which two million copies were printed. The first edition appeared in 1853. By this time Bertelsmann was publishing not only Christian literature, but also historical and philological books, as well as novels. It ran its own printing press as before. Heinrich Bertelsmann, who inherited the business from his father, was able, as a result, to build on a very wide foundation that prevented his company from remaining a small publisher of denominational literature.

The printing and publishing house grew considerably in the second generation, thanks in part to the acquisition of other publishing houses that could not hold their own against competition in the market. This tradition of buying up weaker competitors to modernize them and thus make them competitive once more is a policy that Bertelsmann still pursues. By the time Heinrich Bertelsmann died in 1887, his 60 employees had moved into a brand-new building.

The company consequently came under the ownership of the Mohn family in its third generation, after Heinrich Bertelsmann’s only child, Friederike Bertelsmann, married Johannes Mohn in 1881. Johannes Mohn was a minister’s son from the Westerwald who had learned about the book trade under Heinrich Bertelsmann. Although without personal means and an outsider in Gütersloh, Mohn immediately took on the responsibilities of the business after his father-in-law’s death, showing considerable talent in its management. In particular, he expanded the printing side so that book production could be increased steadily without incurring outside costs.

For this conservative company, with its strong allegiance to throne and church, the German defeat in World War I and the consequent revolution, bringing about the kaiser’s abdication, was a painful break with the past. Disheartened by events, the 65-year-old Johannes Mohn passed on the responsibility for the business to his son Heinrich, only 26 years old at the time. Like his great-grandfather, grandfather, and father before him, Heinrich Mohn had had the best possible theoretical and practical training for his career as a publisher. Bad health and hard times would, however, prevent him from enjoying his position to the full.

Surviving World War II

Before the war, Johannes Mohn had already had a taxable income of 100,000 marks a year. He was a millionaire. Despite the family wealth, the Gütersloh printing and publishing house was almost forced to close, not long after Heinrich Mohn had taken it over, because of the effects of galloping inflation in Germany in 1923. For the first time in the company’s history, no new employees were taken on, while valued staff had to be laid off. Scarcely had this crisis been overcome when an even greater world economic crisis broke out in 1930.

Heinrich Mohn countered these difficulties and the Third Reich with the help of his Christian convictions. Like his predecessors he was extremely close to the Evangelical Church and in particular to the part of that church, the Bekennende Kirche, or German Confessional Church, which stood by its faith in God in opposition to Hitler. At the same time Mohn was successfully trading with the German air force, which he supplied with millions of cheap books and pamphlets. When World War II began in 1939, roughly 400 printers, typesetters, and publishers worked for Bertelsmann in Gütersloh. The company had a turnover of 8.1 million reichsmarks in 1941 and by this time had far outstripped its German competitors.

The Nazi authorities, however, disapproved of the company’s publication of religious texts and after the war began, Mohn’s right to print these works was removed. His printing works were provided with less and less paper by the authorities, making it increasingly difficult to operate. When the British forces bombed Gütersloh in March 1945, most of the company’s buildings were destroyed. Although a few of the expensive printing machines remained intact so that the business was able to continue, the company’s future looked uncertain because Heinrich Mohn’s health was failing.

Good fortune came to Bertelsmann’s aid, when Reinhard Mohn returned home from a prisoner-of-war camp earlier than his elder but less-gifted brother, Sigbert Mohn. Neither was to have inherited the company originally, but when the eldest of the four brothers was killed on the sixth day of the war, the position fell to Sigbert. Since Sigbert returned from the Russian prisoner-of-war camp later in 1949, his younger brother Rein-hard took charge of affairs in Gütersloh in 1947.

After his school-leaving exams at the Evangelical Foundation Grammar School in Gütersloh, Reinhard Mohn had wanted to become an aeronautical engineer, but when the war broke out, he was called up to join the German Africa Corps under General Erwin Rommel. After Reinhard was injured, he was taken prisoner by the American troops.

After his return to Gütersloh, Reinhard Mohn took the company helm with determination. When the West Germans suddenly stopped buying books after Germany’s adoption of the deutsche mark in 1948, the young publisher made a daring decision. Instead of hoping for better times like the other publishers of the day, in 1950 he invited the West German retail booksellers to form the Lesering together with Bertelsmann. For a small sum, any reader could become a member of this book club. In return, the reader would receive a certain number of books from C. Bertelsmann Verlag every year.

Company Perspectives:

Bertelsmann is an international media corporation. We provide information, education, and entertainment around the globe. The ultimate purpose of our community is to contribute to the advancement of society. We strive to be leaders in the markets in which we operate. Our joint efforts focus on creative content, customer relations, and strong return on capital. We want to ensure motivating and fair working conditions. We commit ourselves to the continuity and progress of our corporation.

There had already been book clubs in Germany. What was new about the Bertelsmann Lesering, however, was that the “corner bookshops” were made partners by the publishing house. With this type of direct sales the bookshops also profited, whereas previous book clubs had only created undesirable competition. Nevertheless there were still those who were critical. Many bookshop owners who did not acquire any Lesering members and consequently did not benefit from the club felt threatened. They were afraid that the Bertelsmann Lesering would take away their customers, but these fears proved to be exaggerated. In fact, the Bertelsmann Lesering won many people over to buying books who previously had not dared to go into bookshops for fear of their lack of education being exposed.

The Bertelsmann Lesering proved highly successful. It gave the Gütersloh printing and publishing house two decisive advantages over its competitors: a certain guarantee of purchases of its own books and the high-capacity use of its printing presses. These two factors combined to make Bertelsmann’s turnover soar in the 1950s. Company turnover doubled each year between 1951 and 1953, going from DM7 million to DM30 million. This was a far greater turnover than that of any other book publisher in West Germany. In 1956-57, Bertelsmann was to break the DM100 million barrier. By 1973, Rein-hard Mohn saw the figure reach DM1 billion. At the end of this 22-year period, the company employed a workforce of 11,000 at Gütersloh and elsewhere as opposed to the original 500 workers in 1951.

Postwar Success

The success of the company could not be explained by the Bertelsmann Lesering alone. Two additional decisions implemented by Reinhard Mohn were to be of great significance. The first, born from necessity, was to cover the company’s enormous need for capital; Mohn made his employees shareholders, but without voting rights. This and other socially minded actions made the Gütersloh office, far from West Germany’s glittering metropolis, a greatly envied workplace. Mohn’s second decision was to branch out from books and invest in modern media such as records, magazines, and television to keep pace with changing consumer demands.

These changes all took place with breathtaking speed in the 1950s, 1960s, and 1970s. Most successful was the acquisition of a stake in the Hamburg publishing company Gruner + Jahr, which was gradually built up to a 74.9 percent shareholding in 1976. Not only did the Hamburg sister company bring in excellent results, owing to good management, but it also helped Bertelsmann achieve wider acceptance in the media world following a long period during which the Westphalian family business had been regarded as rather provincial.

The principle behind Bertelsmann’s acquisitions was always the same. Reinhard Mohn bought firms that were active in related fields of business and which could be purchased relatively cheaply because of problems they could not solve themselves. He would place a couple of trusted colleagues in leading posts and leave them to work hard on their own. Delegation of responsibility and decentralization of business were his beliefs. For ambitious managers who valued a certain degree of independence, it was and remained a challenge. By 1994 Bertelsmann consisted of around 300 profit centers, which operated virtually independently from one another and were coordinated from the group’s headquarters in Gütersloh.

Business Expansion Abroad

During the end of the 1960s, Bertelsmann reached the limits of its growth within the German-speaking world. Mohn decided to expand the business abroad. The first step was to introduce Bertelsmann’s Lesering to Spain, with all the other sectors of operation—from the printing works to the book and magazine publishing companies—following at short intervals. As a result, turnover rose to DM5.5 billion by 1980 and the number of employees rose to 30,000 worldwide. Bertelsmann transformed into a public limited company because of the colossal growth in its capital requirements, prepared to leap to the top of the media world league.

In 1981 after more than 30 years at the head of the company, Mohn moved from being chairman of the company to being chairman of the supervisory board. For the first time in Bertelsmann’s history, Mohn left the operational running of the company to a manager who was not a member of the family. In taking this step he instituted a ruling which he applied to all members of the board and to himself and which would become company policy at Bertelsmann: employees may not remain in their jobs past 60 years of age.

Key Dates:

1835:: Carl Bertelsmann starts the company, specializing in the publication of hymnbooks and devotional pamphlets.
1850:: Carl Bertelsmann dies and his son, Heinrich Bertelsmann assumes leadership of the company.
1887:: With Heinrich Bertelsmann’s death, the company comes under control of the Mohn family.
1945:: Most of the company’s buildings are destroyed by British bombing raids.
1950:: Reinhard Mohn introduces the hugely successful Lesering, the first Bertelsmann book club.
1962:: Bertelsmann takes its first step abroad, founding a book club in Spain.
1969:: Continuing to expand into various media, Bertelsmann enters the magazine business by purchasing a stake in the Hamburg publishing house Gruner + Jahr.
1979:: During 1979-1980 Bertelsmann expands into the U.S. market by acquiring Arista records and Bantam Books.
1986:: The RCA label and Doubleday publishers are purchased, and Bantam Doubleday Dell publishing group is incorporated.
1987:: The company’s global music businesses are combined to form Bertelsmann Music Group (BMG).
1998:: Bertelsmann takes over Random House, merging it with Bantam Doubleday Dell to create Random House, Inc.
2000:: Europe’s biggest television group, the RTL Group becomes Bertelsmann’s first complete corporate division to go public, and is listed on the London stock exchange.

Under its new boss Dr. Mark Wossner (a former assistant to Mohn, who had made his way to the top beginning in the late 1960s in the printing and industrial plant sectors), Bertelsmann AG held the position of the leading media group in the world for a time in the mid-1980s (until Time and Warner merged in 1989). This leadership role was made possible by several acquisitions in the United States, which stretched the Westphalian company to the limits of its capacity. Between 1985 and 1986 Bertelsmann acquired the publishing group Doubleday-Dell and turned the music section of RCA into the BMG (Bertelsmann Music Group). It was a massive package, for which Wössner paid more than US$800 million. This show of strength catapulted Bertelsmann AG’s world turnover above DM9 billion, with the group employing more than 40,000 people worldwide.

Bertelsmann also looked to Eastern Europe, where possibilities had been revealed by the fall of the Berlin Wall and the Eastern Bloc. With world turnover of DM13.3 billion in 1989-90, Bertelsmann AG was well equipped to make the most of these developments. In 1990 alone, Bertelsmann spent DM1 billion in the newly opened eastern Germany, by starting a book club, buying the largest regional newspaper there, and acquiring in a joint deal with Maxwell, the publisher of Berlin’s leading daily newspaper.

The company’s major moves into the U.S. market did not immediately pay off. In 1992, for instance, 21 percent of Bertelsmann’s sales originated in the United States, but only about 10 percent of its profits. But it was the acquisition of the New York publisher Random House in 1998, the largest investment in corporate history that finally catapulted the United States into the position of being Bertelsmann’s largest market, garnering 33.8 percent of the company’s revenues by 2000. Random House was merged with Bertelsmann’s Bantam Doubleday Dell to create the behemoth new publishing company dubbed Random House, Inc. With a stable of respected and popular authors including John Updike, Toni Morrison, Michael Crichton, and John Grisham, Random House, Inc. became the largest book publisher in the Anglophile world.

By the mid-1990s, in the area of multimedia, BMG Entertainment decided that rather than making acquisitions or developing products and services on its own, it would follow a strategy of partnering with the world’s most innovative software developers. The earliest significant computer technology venture was BMG’s partnership with the leading American online service provider, America Online, to set up online services in Germany, France, and England. Bertelsmann financed the 50-50 venture with US$100 million and also gained a 5 percent stake in America Online (AOL) with an additional US$50 million investment. This early bet on AOL, suggested to Bertelsmann’s management board by Thomas Middlehoff, then head of corporate development, turned out to be a goldmine. It also boosted Middlehoff’s reputation for forward-thinking, winning him the position of CEO of Bertelsmann in 1998. As AOL’s CEO Steve Case told Business Week in November, 2000, this early gamble showed Middlehoff could “provide the leadership necessary to bring Bertelsmann into the Internet Century.” When AOL merged with Bertelsmann’s competitor Time Warner in 2000, Bertelsmann had no choice but to cut its alliance with AOL, but the sale of its 5 percent stake in AOL and 50 percent stake in AOL Europe brought Bertelsmann more than US $7 billion.

However, all was not rosy for Bertelsmann at the beginning of the new millennium. The Bertelsmann Music Group struggled despite having a banner year in 2000, with BMG artists, such as Carlos Santana, winning 24 Grammy Awards. The studio, featuring staple acts like Whitney Houston and the Dave Matthews Band, pulled in a 4.7 percent return on sales for the year. But with a dearth of new recordings, and a shake-up in management, BMG struggled to stay in the black. The music business in general also perceived a threat from Internet Web sites that allowed users to share digital music files for free, a practice the studios perceived as copyright infringement and cutting into profits. The most successful of these sites Napster, with over 50 million users, came specifically under fire in 2000 as five major recording studios, including Bertelsmann, sued the file-sharing upstart. But in late 2000, Thomas Middlehoff shocked the other studios by offering Napster a $60 million “loan” to help it create a secure technology that would allow users to pay to trade music, in order to not violate copyright laws. In return, if Napster delivered, Bertelsmann would drop its lawsuit. Middlehoff told BuinessWeek Online, “If we didn’t do anything, the music industry would die.”

In 2001, despite the struggling BMG, the downward spiral of the popularity of its mainstay book clubs, the shakiness of various dot-com investments, and drops in print advertising in the Gruner + Jahr magazine division, Bertelsmann was not in trouble financially. The company was nearly debt-free, boasted a 15 percent sales growth in the previous year, and sat on US $13 billion in cash (much from the sale of its stake in AOL), which was ripe for new investments.

In a bold move in Februrary 2001, Bertelsmann acquired an additional 30 percent stake in RTL Group, Europe’s biggest television company (with annual sales of about $4 billion), giving it a 67 percent majority stake. Acquiring the 30 percent stake from Groupe Bruxelles Lambert, Bertelsmann offered a 25 percent stake of its holdings in return. This move sent the message that Bertelsmann was prepared to deal with the repercussions of Groupe Bruxelles Lambert selling its stake in the company a few years down the line, making Bertelsmann a publicly listed company for the first time in the company’s long history. But by taking control of RTL, and developing a relationship with Napster, Bertelsmann was paving the way to take a major part in the future of file-sharing of TV and video content on the Internet. By reinventing itself for the digital world, Bertelsmann seemed willing to take chances in order to maintain and better its already enviable position in the media industry.

Principal Subsidiaries

Random House, Inc. (New York); Random House Group (London); Plaza & Janes (Barcelona); Verlagsgruppe Random House (Munich); Gruner + Jahr (Hamburg; 74.9%); Prisma Presse (Paris; 74.9%); Gruner + Jahr USA (New York; 74.9%); Brown Printing (Waseca; 74.9%); BMG Music (New York); BMG Ariola (Munich); BMG Japan (Tokyo); Sonopress (Gütersloh); RTL Television (Cologne); RTL Radio (Paris); Pearson TV (London); UFA Sports (Hamburg); Springer Verlag (Berlin & Heidelberg; 86.5%); MOHN Media (Gütersloh); Maul-Belser (Nuremberg; 75%); Bertelsmann Services Group (Gütersloh); BCA (London); Bookspan (New York; 50%); Barnes & Noble.com (New York; 40%); bol.com AG (London, Munich).

Principal Divisions

Bertelsmann AG; Random House; Gruner + Jahr AG; BMG; RTL Group; Bertelsmann Arvato AG; DirectGroup Bertelsmann; BertelsmannSpringer; Bertelsmann in the USA.