What to Read Into Bertelsmann's Acquisition of Random House?

By JOSH GETLIN

Jan. 24, 1999 12 AM PT

TIMES STAFF WRITER

NEW YORK —

Reinhard Mohn’s journey to the heights of international publishing began humbly enough--in an American camp for German prisoners during World War II. While he was behind barbed wire, the Nazis shut down several divisions of his family’s book business and jailed three officials. Later, Allied planes flattened what was left of the Bertelsmann company’s physical plant in northern Germany.

Some might have thought the 110-year-old firm was kaput. But Mohn spent the war years watching and learning: He studied business administration in a Kansas POW camp and was impressed by America’s reliance on entrepreneurs. He admired the nation’s flourishing book clubs and couldn’t help but contrast its free press with Germany’s rigid dictatorship.

When he returned home in 1946 at age 25, the young executive used many of these insights to help rebuild his family’s shattered business. And now, more than 50 years later, Bertelsmann sits astride the American book world. The company has created a juggernaut of literary and economic clout that sparks both awe and criticism, six months after its $1.4-billion purchase of Random House Inc., the crown jewel of U.S. publishing.

The stunning acquisition--which merged Random House with Bertelsmann’s existing holdings, including Bantam, Doubleday and Dell--instantly created America’s largest trade, or general-interest, publisher. At cocktail parties, Manhattan’s literati buzzed that Germans, once known for burning books, now spend billions on them. And they relished the irony that Germany has boldly increased its stake in the American book world at a time when other media companies--such as Viacom, Time-Warner, Walt Disney and Rupert Murdoch’s News Corp.--are bearish about their publishing ventures, some even seeking to sell them off.

“The idea that your publishing house could be swallowed up by an even larger one is disconcerting,” said Cynthia Ozick, a novelist whose work is published by Knopf, a division of Random House. “But that’s the trend in publishing, bigger and bigger, and I suppose it’s a very good thing they [Bertelsmann] don’t sell potatoes. They care about selling books, which they’re entitled to do.”

Bertelsmann’s aggressive move continues a trend of German companies’ forging into American markets, such as Daimler-Benz’s purchase of Chrysler and Deutsche Bank’s acquisition of Bankers Trust Corp. All of these deals rocked the financial world, but Bertelsmann has not bought just another big company. It owns a major piece of America’s cultural patrimony, with contemporary authors ranging from Norman Mailer and Toni Morrison to John Grisham and Michael Crichton, along with classic works by international giants such as William Faulkner, Thomas Mann and Marcel Proust.

Depending on the estimate, Random House’s 27 divisions generate from 13% to 36% of U.S. trade book sales. And now the world’s third-largest media company is poised to get even bigger. Shortly after gobbling up Random House, the Bertelsmann conglomerate--which also includes BMG records, large foreign TV holdings, U.S. and European magazines, book clubs and other ventures--paid $200 million to become a 50% owner of barnesandnoble.com, the bookselling giant’s new Internet retailer.

The company has an $800-million stake in America Online and is working with the firm to develop European business. Meanwhile, Bertelsmann has invested in the Rocket eBook, a hand-held device for reading books and magazines in electronic form. As the growth in online book sales and related products explodes, the Germans will be in the vanguard here and abroad.

“All of this has dramatically changed the landscape of publishing,” said John F. Baker, editorial director of the Publishers Weekly trade paper. “When you add it up, the Bertelsmann deal is a hefty bundle, even in an age of global merger and consolidation. They have an upbeat view of the U.S. market.”

The German invasion, however, raises important concerns: Will foreign ownership of a company as large as Random House create cultural friction between German business and the U.S. book world? Does the dominance of huge publishers and booksellers, now linked on the Internet, spell doom for smaller publishers and sellers? And will the heft of one company allow it to decide which books will--or won’t--be sold to American readers?

Thomas Middelhoff, Bertelsmann’s newly appointed chief executive, brushes aside such negative scenarios. His company has traditionally given its subsidiaries great autonomy, he said, and at a time when more American publishers are formed every year, he believes diversity will thrive in the U.S. book business.

Besides, the 45-year-old CEO has more on his mind than just publishing. When visitors enter Bertelsmann’s American headquarters, a gleaming black-and-green skyscraper in Times Square, it’s a multimedia experience: Rock music throbs from a record store and a large wall of television screens plays music videos and blurbs for other in-house products.

“Bertelsmann is not a typical German company, because if you ask me who runs our business in America, I’d say Americans run it,” Middelhoff noted. “We have 15,000 to 16,000 American employees, and we are committed to the values of democracy and American culture. . . . The question is not whether Bertelsmann is German or American. The question is: Is it a successful company?”

The family-owned firm, founded in 1835, began publishing prayer books and hymnals before branching into the general market. Unlike flashier companies based in Berlin or Frankfurt, Bertelsmann is headquartered in Gutersloh, a small town northeast of Dusseldorf, and it practices a conservative business philosophy. Over the years, it has come to dominate the German publishing market, aided by a nationwide chain of book clubs. Mohn, who engineered the company’s postwar comeback, still sits on its board of directors.

Bertelsmann’s U.S. beachhead is established, but culturally it’s still a long way from rural Germany to midtown Manhattan. Soon after he was named CEO-designate in 1997, Middelhoff spent a year in New York, staying at the chic Sherry Netherland Hotel. He brushed up on his English and learned how to be a media mogul ‘90s-style, hobnobbing with Murdoch, uber editor Tina Brown and Disney’s Michael Eisner.

His crash course in America yielded dividends, Middelhoff said--as well as a keen sense of business limits. The company has no plans, for example, to emulate its peers by branching out into film.

“Hollywood is a special culture,” he explained. “We don’t have that experience or background, and for us to go there as a group of German managers wouldn’t work. We’d have the same experience the Japanese did years ago. That’s why we have restricted our expansion to the U.S. book market.”

Other media conglomerates are watching Bertelsmann’s moves closely, and some are mystified. Why did the Germans expand their share of the U.S. publishing market at a moment when retail bookstore sales have flattened and there is no sign of immediate recovery? Random House was sold to Bertelsmann by media magnate S.I. Newhouse, whose family also owns Conde Nast magazines and a host of American newspapers. Although the book company is considered a prize, it too has suffered from a sluggish retail market.

“We bought Random House because we’ve been publishing books for 150 years, and we know that Americans will always want to read,” Middelhoff said. “We have publishing units like Random House across the world; we have printing plants worldwide; we have 45 million members of our own book clubs, plus warehouses, and we’re building for the future with online sales.”

Bertelsmann is not alone in its confidence. In recent years, the Holtzbrinck group in Germany bought three of America’s leading independent publishing houses--St. Martin’s Press; Henry Holt; and Farrar, Straus & Giroux. Meanwhile, the British-owned Pearson extended its own transatlantic foray, merging Penguin and newly acquired Putnam into America’s second-largest book company.

The German moves shook up New York publishers, but they stirred up less controversy than a similar incursion in the early 1990s when the Japanese company Matsushita took over Putnam as part of its acquisition of MCA. Back then, there were xenophobic rumblings about Japanese culture threatening America’s entertainment tradition. Yet there has been little of that this time around.

To be sure, both German companies have been embarrassed by recent disclosures about their activities during the Nazi era. Bertelsmann has appointed a committee of scholars to investigate accusations, recently aired in the Nation, that it printed some pro-Nazi titles and was the biggest supplier of propaganda books to Hitler’s army.

According to a June 1998 profile in Vanity Fair, the Holtzbrinck firm produced books and magazines for German soldiers, and its wartime leader joined the Nazi party.

Since the war, both publishers have been models of a more cosmopolitan Europe: Their leaders have spoken out against anti-Semitism, and Bertelsmann has created an international foundation devoted to a variety of charitable causes, including Israeli-German cultural dialogues. To date, their German roots have not sparked a major controversy in the United States.

“A key reason is that Bantam-Doubleday-Dell operated as an American company for years, and it had a good track record,” said Peter Olson, a Midwesterner who is the new CEO of Random House. “In the same way, our company in the United Kingdom, Transworld, is emphatically British. All of these companies are managed not as German firms, but as companies focused on a local market.”

Officials with Bertelsmann and Holtzbrinck stress that sense of autonomy, and it may prove to be one of the more intriguing surprises of the recent changes in ownership: While big American media companies are buffeted by the stock market, nervously watching quarterly profit reports, the privately held German publishers are accustomed to the ups and downs of publishing, often taking a more long-term view. This explains their interest in a business that rarely generates vast overnight profits.

Still, Baker and other industry observers speculate that economic pressures will inevitably take a toll on Random House. They suggest Bertelsmann is likely to close down some of its 27 publishing imprints this year as a cost-cutting measure, and also reduce the number of books it produces. Inside the publishing house, however, top officials are cautiously optimistic.

“We didn’t know what to expect, but now that we’re into this six months or so, these new owners are walking the way they talk it,” said Ann Godoff, publisher of the Random House imprint. “I keep looking for sign of German-ness. . . . I keep waiting for the other shoe to drop, but it hasn’t.”

Although Random House’s once-legendary enthusiasm for fat advances has waned, Godoff said she continues to pay healthy sums for certain titles, with no interference. “The new owners are more interested in reducing printing costs and distributing books than they are in the content,” she said. “It’s a pleasant surprise.”

Across town at Farrar, Straus & Giroux, longtime publisher Roger Straus said Holtzbrinck has not interfered with his editorial decisions. He noted that the acquisition has helped his company compete more effectively for big titles because of its link with St. Martin’s Press, which has a big paperback operation. “For us it’s been an improvement,” Straus said.

Others are not so upbeat. When Bertelsmann announced plans to buy Random House in March, the Author’s Guild tried unsuccessfully to persuade the Federal Trade Commission to block the merger.

“We have members who say to us, ‘There is now one less major publisher to submit my work to, and that’s just a fact,’ ” said Kay Murray, general counsel for the Author’s Guild. “I’m afraid that a publisher who has this much of a market share will be less willing to take risks with authors who don’t sell a large number of books the first time out.”

Yet big is here to stay, cautions Baker of Publishers Weekly. And on the plus side, he suggests, the book business is easy to break into, with the number of independent publishing entities in the United States at 35,000 and growing. “Whereas the large get larger, the small continue to multiply,” he noted. “It’s a world in flux.”

The only constant is that publishing remains a crapshoot. At Random House, Godoff saw an earlier owner ring up large sales--and take financial baths--like any other publisher. The rules of the game don’t appear to have changed under the German regime.

“Ultimately, you’re on your own,” she said. “If I make a lot of mistakes, I’m presumably gone. But if I fall on a sword, it’ll be mine. And that’s really all I could ask for.”

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Bertelsman and Its Rivals

Bertelsman, the world’s third-largest company, owns Random House, the largest publishing house in the U.S.

1997 revenue

Random House: $1.8 billion

Penguin Putnam (owned by Pearson): $871 million

HarperCollins (owned by News Corp.): $737 million

Simon & Schuster (owned by Viacom): $550 million

The Bertelsman empire also includes:

BMG Music; Arista, RCA, Windham Hill.

Magazines: McCall’s, Family Circle, the German magazine Stem and many others.

Broadcasting: 22 TV and radio stations in nine European countries.