You can't blame Thomas Middelhoff
for trying. The chief executive of German media behemoth
Bertelsmann -- doted on in the business pages
as a Visor-toting visionary dragging an ossified corporate
empire out of the Westphalian mist -- has upped the
ante for global synergizing in one of his company's
most sweeping reorganizations to date.
Following the lead of arch-rival
AOL Time Warner, last fall Bertelsmann lumped
its entire content portfolio -- including Random
House, BMG and Gruner + Jahr -- into
what's been grandly dubbed the Bertelsmann Content
Network. The idea was simple: foster cross-media
synergies by sharing corporate turf. Remaining global
operations were then stratified into two other divisions:
Arvato AG took on printing and IT units, while the Direct
Group comprised all of the company's direct-to-customer
activities.
The most motley division is
this last one, officially known as DirectGroup Bertelsmann,
now home to book clubs, music clubs and e-tailers including
BOL and CDNow. The group also oversees
Bertelsmann's 40 percent stake in BarnesandNoble.com.
As Middelhoff struggles to turn the company's cherished
book-centric culture toward a hot-wired future, the
Direct Group may be the spot where his vision proves
most likely to founder.
By all accounts, the dream is
a glorious one. ''Our book and music clubs,'' the company
proclaimed last fall, ''are in the midst of a dynamic
global transformation process by which they are becoming
more customer-oriented community businesses.'' The Direct
Group, headed by Klaus Eierhoff, would use the
Internet as the ideal means of distribution; jazz up
traditional clubs and direct marketing channels with
e-commerce outlets; modernize hoary marketing tools;
and ''exploit the potential for synergies between e-commerce
and the clubs on an international scale.''
Reality isn't so rosy. The Direct
Group currently shows losses, insiders say. Clubs are
suffering ''mounting competitive pressures'' in all
English-language markets, according to company statements,
''especially from fast-growing Internet book retailers.''
The group's e-commerce units have lost hundreds of millions
of dollars in the past year alone. And at bottom, ancient
rivalries among direct-to-customer divisions are making
for uneasy synergies: a potential family feud between
Bertelsmann's e-commerce chief, Andreas Schmidt,
and Eierhoff has raised further questions about the
division's future.
Details about the Direct Group's
conundrums are hard to come by, and few executives are
in a position to speak on the record. But Middelhoff,
known to be a big-picture man and not a whiz at operational
nitty gritty, has acknowledged that among the gravest
quandaries facing Bertelsmann is the question of what
to do with its worldwide book and music clubs.
They are a potentially formidable
force. As of last year, before the realignment, the
book clubs had counted 28 million members worldwide,
contributing 52 percent of the book division's revenues.
(Book publishers accounted for 44 percent.) Music clubs
in the U.S. had another 12 million members. Though the
Direct Group did not exist as such during the last accounting
cycle, Bertelsmann estimates its turnover for the current
fiscal year to clock in at more than $3.3 billion.
Those are big numbers, but whether
they add up to a wham-bam direct-to-customer strategy
is the question dogging the European book clubs -- once
the company's most stable cash cow -- and their English-language
counterparts. ''Nearly all book clubs face profit pressure
because of lower margins,'' according to a Bertelsmann
statement. ''The risk of increased costs to acquire
rights and the possible end in the mid-term of mandatory
retail book pricing systems in Germany and Spain may
have an impact on profits.'' Indeed, according to company
financial statements, operating income in the book division
last year was $26.6 million, down drastically from $120
million the year before.
Falling income was attributed
to investments in Internet distribution operations,
as well as expenses related to BookSpan, the
joint venture with AOL Time Warner's Book-of-the-Month-Club,
which, along with Bertelsmann's Canadian holdings, operates
some 45 book clubs. A Bertelsmann spokesman acknowledged
that the clubs ''have been facing a challenging situation
recently,'' but added that ''we are on a very good path
now to achieve our goals.'' (BOMC showed an operating
loss of $18 million in 1999, before it became part of
BookSpan, on revenues of $321 million.) Officials envision
over a hundred clubs in the coming years, on the order
of the new fly-fishing club, called On the Rise, which
has targeted the 6.5-million adult American angler market.
Member perks for the clubs are slated to include Web-based
conveniences such as customized delivery options and
online chats with fellow readers.
Still, BOL and bn.com seem
somewhat synergy-deprived. Though now deployed in some
16 countries, BOL is eating loads of cash -- expenses
are high in part because the e-tailer is operated on
a country by country basis -- and the results are debatable.
A Direct Group spokesman insisted that BOL has achieved
''leading market positions in the countries where it
is operating,'' and is working on expanding its position
as a media retailer, including the addition of videos,
DVDs, games and software. However, the Bertelsmann spokesman
said, ''There are no plans to make BOL into a comprehensive
portal site, as the DirectGroup's businesses focus exclusively
on media commerce.'' As the corporate parent gears up
to invest a reported $3.1 billion over the next three
years in online activities, industry watchers suspect
that BOL may be left behind, especially if Bertelsmann
eCommerce Group chief Schmidt can devise a way to parachute
out of the mess while saving face for all parties involved.
BOL's future does look brighter
in Asia. In December, it launched its shop in China,
created in close cooperation with that nation's Bertelsmann
Book Club, itself a joint venture that's now up to 1.5
million members. BOL China opened with access to 110,000
Chinese-language titles, and fired up Bertelsmann brass,
as well. ''BOL China is leading the way for the direct
business at Bertelsmann,'' Direct Group chief Eierhoff
said in a statement, adding that ''the close cooperation
between the Club business and BOL illustrates the multi-channel
strategy of the DirectGroup.''
Meanwhile, a Direct Group spokesman
pointed to active cooperation between Bertelsmann's
British BCA book club and BOL's U.K. site. The arrangement
includes links between the two organizations' Web sites,
a collaborative sci-fi promotion coming up this month
and even a ''bounty per customer'' paid when members
from one group visit or make purchases at the other's
site (club members get a 10 percent discount at BOL,
shown as a credit on their club bill). In Germany, PC
terminals have been installed in club shops, with access
to the BOL site. And on a larger scale, costs are being
cut through a centralized purchasing unit for European
clubs, especially in the areas of paper and merchandising;
a common IT platform for club businesses; and a move
toward compatible back-end machinery in both club and
e-commerce units.
Yet synergies of any sort seem
missing-in-action from Bertelsmann's stake in BarnesandNoble.com.
There, Bertelsmann's long tradition of going into a
country and partnering with the strongest player has
run afoul of the Riggio brothers, who seem intent on
keeping bn.com close to the vest. The site, which last
month announced layoffs of 350 employees and closed
two distribution centers, reported a net loss of $275.7
million for the year, up from $102.4 million the year
before. Knowledgeable sources suggest that the river
of recent bad news might be calculated to drive the
dot-com's price down, all the better for the Riggios
to grab it back and fully exploit some clicks-and-bricks
synergies of their own.
The apparent Riggio brush-off
has had peculiar effects, namely that the words ''Bertelsmann''
and ''Amazon.com'' are being increasingly uttered
in the same sentence, with ''acquisition'' never far
behind. Amazon's possible alliance with Wal-Mart
notwithstanding, the e-tailer would of course make a
prime piece of online turf for Bertelsmann's Direct
Group portfolio, particularly since Amazon's stock price
-- now trading around $12 and change, off almost 90
percent from a December 1999 high that topped $106 --
is approaching rock-bottom. Whispers to that effect
have been heard in the halls at Random House, a source
says, though Bertelsmann is certainly just one of many
global conglomerates savoring the moment Amazon chief
Jeff Bezos comes begging.
Complicating the acquisition
scenario is Bertelsmann's recent deal for control of
the RTL broadcast group, which has paved the
way for the floating of Bertelsmann shares on the stock
market in three years, something analysts say will finally
bring to fruition Middelhoff's dream of taking the media
giant public. The prospect of IPO-financed acquisitions,
combined with the broadcast deal, points well beyond
mere Web synergies. Bertelsmann already owns the biggest
television company in Germany, and holds stakes in some
22 TV broadcasters in nine countries. Observers note
that a studio purchase would make a smart next move.
Convergence, anyone?
Back in the Direct Group, however,
rivalries are causing some Middelhoff-oiled gears to
gnash. Last holiday season, for example, BMG Direct
chief George McMillan admitted to strategizing
against competitor -- and corporate confrere -- CDNow.
Such talk belied McMillan's real objective, however,
which was figuring out how to get CDNow under his own
wing, something he has now managed to do. (In a quiet
move, CDNow's chief now reports to McMillan.) Book-vs.-music
tensions must flare at times, too. ''All the backbone
and infrastructure is in the hands of the music business,''
says one publishing veteran. Fulfillment operations
are run by music club execs, relegating books clubs
to the status, in effect, of a third-party client.
A few kinks in the Direct Group
reporting chain can also be seen. While music clubs
and the online units report to e-commerce chief Schmidt,
BookSpan president and CEO Markus Wilhelm reports
to Direct Group chief Eierhoff. Hence book clubs and
music clubs aren't clicking together as much as they
might. And while Schmidt reports to Eierhoff on paper,
he's lately been relishing the role of being Middelhoff's
sidekick for the Napster follies, and parlaying his
knack for publicity into an enlarged e-commerce fiefdom.
Trouble for BOL and questions about the stricken Napster
have only exacerbated the power struggle between Schmidt
and his titular boss Eierhoff. So much for synergy.
Chalk it all up to the usual
reshuffling aches and pains; Bertelsmann's e-commerce
investments may pay off in good time. Yet the Direct
Group's woes seem to run deep, and signal a chink in
Middelhoff's big-picture strategy. The entire direct-to-customer
gambit can be reduced to one premise: the value chain
is changing, so we're going to own every piece of it.
Whatever happens, we're covered: content, distribution
and customer relationship. As the company suffers what
it frankly calls ''unbelievable competitive pressure,''
however, it's clear that owning the whole value chain
comes at a steep price. Even with Bertelsmann's fabled
billions, yoking those links may be more costly than
anyone dared imagine.
