Bertelsmann Pushes Digital, International Expansion

Thomas Rabe - PR Head Shot - H - 2011

The German media giant forecasts major growth in the wake of BMG, Penguin-Random House deals.

Bertelsmann, the oldest of the global media giants, says it turned a corner last year in its efforts to transform from an analog, Eurocentric company to one focused on digital media and the faster-growing territories of Asia, the U.S. and Brazil.

Bertelsmann CEO Thomas Rabe last year began what is arguably the biggest overhaul in the 178-year history of the German media group.

STORY: Bertelsmann to Acquire Full Control of BMG

Already, it has resulted in two mega-deals: the merger of Bertelsmann's subsidiary Random House with Penguin to create a $3 billion publishing megalith and Bertelsmann's planned takeover of music-rights group BMG, which will give the company full control over rights to more than 1 million songs from artists including Bruno Mars, Aerosmith, Johnny Cash and David Bowie.

Rabe is also looking at selling off just under 25 percent of its stake in its core TV business, RTL Group – owner of American Idol producer FremantleMedia and more than 50 television channels across Europe – in order to raise cash to drive further acquisitions.

STORY: Germany's Bertelsmann Considers Reducing Stake in RTL Group

Rabe said after several years of flat or declining revenues, 2012 marked a turning point. Bertelsmann booked $20.8 billion (€16 billion) in sales last year, a 4.5 percent jump, and Rabe forecast that sales would climb to $23.3 billion (€18 billion) in 2014.

Deals including BMG and the Random House-Penguin merger will play a role in that growth, but both point to a broader strategic shift at Bertelsmann. In the music business, Bertelsmann is focusing on rights management, not the traditional album sales of a music label – a business it exited a few years back. With this move, the company hopes to benefit from the shift in the music industry from disc sales to licensing. Already the fourth-largest music-rights group worldwide, BMG is forecasting annual revenues of around $650 million (€500 million) within five years.

The publishing company merger, which has already received the go-ahead from the U.S. Justice Department, will further strengthen Bertelsmann's foothold in the American market. The new Penguin-Random House conglomerate, in which Bertelsmann will hold a 53 percent stake and Penguin owner Pearson 47 percent, will control a third of trade book sales in the U.S. Bertelsmann expects final regulatory approval for the deal from European watchdogs later this year.

Europe remains at the core of the company's operations – Euro broadcaster and TV production unit RTL Group is still Bertelsmann's largest division and main profit machine. But Rabe is shifting the German company's focus to markets in the East – India and China – and the South, to Brazil. Bertelsmann recently opened headquarters in New Delhi and Sao Paulo, launched its first-ever channel in India and saw its publishing and media services operations in China book record results.

“China, India and Brazil will play an increasingly important role” at Bertelsmann, Rabe said at the company's annual press conference in Berlin Tuesday. Overall, he said the group had to become “a faster-growing, more digital and more international company” over the next five years.

What many analysts still see as a missing piece in Rabe's strategy for Bertelsmann is a major presence in the new-media world. The company has made numerous strategic investments – buying stakes in online start-ups, particularly in Asia – but has not yet made a headline-grabbing deal equivalent to BMG or Random House-Penguin.

That could change soon. Achim Berg, former managing director at Microsoft Germany, takes over as chairman of Bertelsmann's services group Arvato next week and is likely to spur on the company's digital transformation.