Germany

Inside Bertelsmann's Ambitions To Dominate The Publishing World

The German publishing giant has completed a mega merger of its Random House publisher with Penguin books. And it isn't done yet.

The climb to the top requires a digital strategy
The climb to the top requires a digital strategy
Caspar Busse

MUNICH - Bertelsmann is not shrinking in front of the fact that people are buying fewer and fewer printed books. Indeed, the German publishing giant's strategy for the age of e-books is to grow – at any cost.

After a failed attempt to take over Gruner + Jahr, Europe’s largest publishing firm, in which it already owns a majority share, Bertelsmann CEO Thomas Rabe, 47, set his sights on merging his Random House publisher with Penguin.

The joint venture was confirmed Monday between American publisher Random House, which is 100% owned by Bertelsmann, and Penguin, the London-based publishing house that belongs to British education and media publisher Pearson that is also owner of the Financial Times.

Bertelsmann will have majority shareholding – and hence the decision-making power -- in the new super-entity named Penguin Random House. Bertelsmann will own 53%, and Pearson’s share will be around 47%. John Makinson, chairman and chief executive of Penguin will be chairman and Markus Dohle, chief executive of Random House, will be chief executive.

The merger would create by far the world’s biggest consumer publisher, as Bertelsmann believes that such scale is the way to meet the e-book age head on. It is not known what anti-monopoly authorities will have to say about the latest deal.

This is just the latest sign that Rabe is playing for keeps. On Friday, he was in Beijing, where he had gathered over 100 Bertelsmann executives for its first internal “China Conference.” On the agenda was exploring how Bertelsmann, one of the world’s biggest media companies, could expand business in China. A good 80% of the company’s turnover currently comes from Europe.

"China, which will soon be the biggest economy on the planet, is a highly attractive market for us," said Rabe. "The framework for foreign investment has improved recently." The Bertelsmann boss announced that the company would be investing further in China, primarily in digital media and education.

Meeting the digital challenge

Growth is a major priority for Bertelsmann right now. Rabe, a finance expert at the helm since the beginning of 2012, wants to see turnover heading north after years of stagnation under his predecessor Hartmut Ostrowski.

But expensive purchases are not in the cards as Bertelsmann continues to be owned 100% by the Mohn family and hence capital cannot be augmented on the stock exchange.

Rabe is however changing the company’s legal form to Kommanditgesellschaft auf Aktien (joint stock company) in the hopes that it can be listed without the owner family losing influence, but the project is faltering. The merger of Random House and Penguin however requires no new capital.

The Random House/Penguin deal is crucial for Rabe after his failure in the Gruner + Jahr (Stern, Brigitte, Financial Times Deutschland) endeavor -- Bertelsmann and the Jahr family that holds 25.1% could not come to terms.

New York City-based Random House is one of Bertelsmann’s four major companies along with the RTL TV group, service provider Arvato and Gruner + Jahr. As Random House’s annual turnover is around 1.7 billion euros, Bertelsmann already owns the world’s largest publishing house. It sells 500 million books a year and prints 11,000 new titles annually. E-book sales are on a sharp rise, particularly in the U.S.

Under contract at Random House and its subsidiaries are best-selling authors like John Grisham, Dan Brown, John Irving, Toni Morrison, John Updike and Orhan Pamuk. A recent publication, Fifty Shades of Grey, sold 30 million copies in the last quarter alone. Random House employs 5,300, and this year’s first semester operating profit was 113 million euros.

Penguin is smaller than Random House, and has a turnover of 1.3 billion euros. It too publishes world-renowned writers. Marjorie Scardino, Pearson’s longtime chief executive, is leaving at the end of the year, fueling speculation that there will be a change of course at Penguin. Pearson makes more than three-fourths of its turnover with schoolbooks and other educational tools, but that part of its business is apparently not for sale.

Worldwide, fiction and non-fiction is dominated by six major publishers called the Big Six. Along with Random House and Penguin these are Hachette Book Group, Harper-Collins, Simon & Schuster and Macmillan. The book sector's crisis is widely acknowledged, as people buy fewer books, and bookshops are forced to close. Increasing use of tablets like the iPad, E-Reader and Kindle is sinking sales of printed books as demand for e-books rises sharply and online booksellers like Amazon and companies like Apple and Google become tough competition for traditional publishing companies.

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