Wheels come off at Bertelsmann

Profit dives 89.9%; music, book club are hardest hit

The 89.9% profit plunge reported Tuesday by German media giant Bertelsmann for 2007 reads like a tale of two companies.

Bertelsmann's profit fell from €2.1 billion a year ago to €216 million ($341 million), and revenue was off 2.6% at €18.8 billion ($30 billion).

Bertelsmann's more traditional businesses — including its music and book club operations — took it on the chin, with profit in near free fall. But the company's TV division RTL Group saw across-the-board growth as operating profit rose from €835 million a year ago to €978 million ($1.5 billion).

Bertelsmann CEO Hartmut Ostrowski said he was considering "all options" for the company's club business, including a sale. A decision already has been made for Direct Group's North American division, which Bertelsmann CFO Thomas Rabe said would go on the block in the coming weeks.

Ostrowski on Tuesday forecast a doubling of profit in 2008, though he expects only a "moderate upturn" in revenue.

Major write-downs and a series of one-time items, including the cost of settling its Napster lawsuits with other music labels, chipped away at Bertelsmann's bottom line. Comparisons with 2006 are tricky as that was a record year for the German group, with the €1.6 billion sale of its music publishing business to Vivendi helping to inflate results.

Stripped of its music publishing sales, revenue at Bertelsmann's music division (the company controls 50% of Sony BMG) fell a staggering 27.8% to €1.5 billion ($2.4 billion) for 2007, and operating profit dropped from €173 million to €93 million ($147 million). While digital music sales jumped 40%, that did not make up for a 17% decline in album sales.

It was a similarly dire story at Bertelsmann's music and book club business Direct Group, where revenue fell 3.7% to €2.6 billion ($4.1 billion). Operating profit contracted from €110 million to €10 million ($16 million).

Bertelsmann wrote down €414 million ($653 million) at Direct Group in North America, reflecting the reduced value of its assets.

But Ostrowski put a brave face on the figures, arguing that the company had "removed risks" like the Napster lawsuits that were settled for a total of €245 million ($387 million) in payouts and legal costs.

Rabe estimated that the Napster payments helped to avert a $17 billion class-action lawsuit by record labels against Bertelsmann.

Ostrowski has set Bertelsmann's ambitious target of €30 billion in revenue by 2014.
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