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Bertelsmann Ag Business Information, Profile, and History

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Carl-Bertelsmann-Strasse 270
Postfach 111
D-33311 Gütersloh
Germany

History of Bertelsmann Ag

Bertelsmann AG is the largest media group in Germany and Europe, and the second-largest in the world to the U.S.-based Time Warner Inc. With operations in 40 countries, primarily in Europe and North America, Bertelsmann is active in four main areas: magazine and newspaper publishing; book publishing and book clubs; entertainment businesses in music, television, and multimedia; and industrial businesses in printing, paper production, and other media-related fields. Among its nearly 500 worldwide subsidiaries, the best known operations include Gruner + Jahr, publisher of magazines in Europe and the United States; Bantam Doubleday Dell, a major U.S. book publisher; and such record labels as RCA, Arista, BMG Ariola, and BMG Victor, which jointly make up BMG/Music, ranked number six worldwide among music companies.

The company was founded as a family business in the middle of the 19th century and had already grown to a considerable size before World War II. The significant expansion phase of the company, however, only began after the German currency reform of 1948, when Reinhard Mohn succeeded with the Bertelsmann book club (the Lesering) in introducing a revolutionary form of direct sales to the traditional German publishing market. Bertelsmann grew into an international force on the back of this great success. In 1995 17.9 percent of Bertelsmann's share capital was in the hands of the Mohn family and 10.7 percent belonged to the Hamburg publisher Dr. Gerd Bucerius, of Die Zeit fame; 71.4 percent of the capital stock was held by the Bertelsmann Foundation, established in 1977 by Reinhard Mohn and intended to take over the Mohn family's share in Bertelsmann and appoint the company's management.

Although a multiple media giant in the mid-1990s, the company began in 1835 as a small publisher of evangelical hymn books and devotional pamphlets in Pietist eastern Westphalia, where its headquarters have remained, resisting any suggestions of transferring to Hamburg or Munich. The founder of the company was Carl Bertelsmann, who was born in Gütersloh in 1791, two years after the French Revolution. His father died before he was two years old. His mother was to find him an apprenticeship in a bookbinder's business as she had done for his elder brother. To avoid conscription into Napoleon's Russian army, Carl Bertelsmann went traveling, going via Berlin to Upper Silesia.

When Carl Bertelsmann returned to Gütersloh in 1815, after Napoleon's defeat and exile, he found that his brother had taken on the position for which he had been trained. It was only after his brother's death in 1819 that Carl Bertelsmann was able to set up as a bookbinder in his home town. "The little Bertelsmann from Gütersloh," as he was known in the area, soon found a place in the Pietist movement that shaped the eastern Westphalian community, and discovered that it particularly needed hymn books for its services. Gradually Bertelsmann's bookbinding business became a book-printing business as well, and then developed into a full publishing house.

This development occurred during the mid-19th century Biedermeier period, a time in which German middle-class culture flourished and which was marked in Westphalia by Prussian government. Carl Bertelsmann was a conservative and a royalist faithful to the Prussian king. He supported the latter's cause during the revolution of 1848--49 in which he became politically involved. Generally, though, he dedicated himself to working industriously for his company which, while small, was expanding rapidly. By the time of his death, it employed 14 people.

When Carl Bertelsmann died in 1850, he left behind a wife and son and a considerable fortune. He had laid the foundations for the company's subsequent development, but he was not there to witness the success of the firm's bestseller, the Missionsharfe (Missionary Harp), a hymn book of which two million copies were printed. The first edition appeared in 1853. By this time Bertelsmann was publishing not only Christian literature, but also historical and philological books, as well as novels. It ran its own printing press as before. Heinrich Bertelsmann, who inherited the business from his father, was able, as a result, to build on a very wide foundation that prevented his company from remaining a small publisher of denominational literature.

The printing and publishing house grew considerably in the second generation, thanks in part to the acquisition of other publishing houses that could not hold their own against competition in the market. This tradition of buying up weaker competitors to modernize them and thus make them competitive once more is a policy that Bertelsmann still pursues. By the time Heinrich Bertelsmann died in 1887, his 60 employees had moved into a brand-new building.

The company consequently came under the ownership of the Mohn family in its third generation, after Heinrich Bertelsmann's only child, Friederike Bertelsmann, married Johannes Mohn in 1881. Johannes Mohn was a minister's son from the Westerwald who had learned about the book trade under Heinrich Bertelsmann. Although without personal means and an outsider in Gütersloh, Mohn immediately took on the responsibilities of the business after his father-in-law's death, showing considerable talent in its management. In particular, he expanded the printing side so that the book production could be increased steadily without incurring outside costs.

For this conservative company, with its strong allegiance to throne and church, the German defeat in World War I and the consequent revolution, bringing about the kaiser's abdication, was a painful break with the past. Disheartened by events, the 65-year-old Johannes Mohn passed on the responsibility for the business to his son Heinrich, only 26 years old at the time. Like his great-grandfather, grandfather, and father before him, Heinrich Mohn had had the best possible theoretical and practical training for his career as a publisher. Bad health and hard times would, however, prevent him from enjoying his position to the full.

Before the war, Johannes Mohn had already had a taxable income of 100,000 marks a year. He was a millionaire. Despite the family wealth, the Gütersloh printing and publishing house was almost forced to close, not long after Heinrich Mohn had taken it over, because of the effects of galloping inflation in Germany in 1923. For the first time in the company's history, no new employees were taken on, while valued staff had to be laid off. Scarcely had this crisis been overcome than an even greater world economic crisis broke out in 1930.

Heinrich Mohn countered these difficulties and the Third Reich with the help of his Christian convictions. Like his predecessors he was extremely close to the Evangelical Church and in particular to the part of that church, the Bekennende Kirche, or German Confessional Church, which stood by its faith in God in opposition to Hitler. This was the church to which Martin Niemöller and Dietrich Bonhoeffer, spiritual leaders of the German Widerstand, or anti-Hitler opposition, belonged. At the same time Mohn was successfully trading with the German air force, which he supplied with millions of cheap books and pamphlets. When World War II began in 1939, roughly 400 printers, typesetters, and publishers worked for Bertelsmann in Gütersloh. The company had a turnover of 8.1 million reichsmarks in 1941 and by this time had far outstripped its German competitors.

The Nazi authorities, however, disapproved of the company's publication of religious texts and after the war began, Mohn's right to print these works was removed. His printing works were provided with less and less paper by the authorities, making it increasingly difficult to operate. When the British forces bombed Gütersloh in March 1945, most of the company's buildings were destroyed. Although a few of the expensive printing machines remained intact so that the business was able to continue, the company's future looked uncertain because Heinrich Mohn's health was failing.

Good fortune came to Bertelsmann's aid, when Reinhard Mohn returned home from prisoner-of-war camp earlier than his elder but less-gifted brother, Sigbert Mohn. Neither was to have inherited the company originally, but when the eldest of the four brothers was killed on the sixth day of the war, the position fell to Sigbert. Since he was only to return from Russian prisoner-of-war camp in 1949, his younger brother Reinhard took charge of affairs in Gütersloh in 1947.

After his school-leaving exams at the Evangelical Foundation Grammar School in Gütersloh, Reinhard Mohn had wanted to become an aeronautical engineer, but when the war broke out, he was called up to join the German Africa Corps under General Erwin Rommel. After Reinhard was injured, he was taken prisoner by the American troops.

After his return to Gütersloh, Reinhard Mohn took the company helm with determination. When the West Germans suddenly stopped buying books after Germany's adoption of the deutsche mark in 1948, the young publisher made a daring decision. Instead of hoping for better times like the other publishers of the day, in 1950 he invited the West German retail booksellers to form the Lesering together with Bertelsmann. For a small sum, any reader could become a member of this book club. In return, the reader would receive a certain number of books from C. Bertelsmann Verlag every year.

There had already been book clubs in Germany. What was new about the Bertelsmann Lesering, however, was that the "corner bookshops" were made partners by the publishing house. With this type of direct sales the bookshops also profited, whereas previous book clubs had only created undesirable competition. Nevertheless there were still those who were critical. Many bookshop owners who did not acquire any Lesering members and consequently did not benefit from the club felt threatened. They were afraid that the Bertelsmann Lesering would take away their customers, but these fears proved to be exaggerated. In fact, the Bertelsmann Lesering won many people over to buying books who previously had not dared to go into bookshops for fear of being shown up for their lack of education.

The Bertelsmann Lesering proved highly successful. It gave the Gütersloh printing and publishing house two decisive advantages over its competitors--a certain guarantee of purchases of its own books and the high capacity use of its printing presses. These two factors combined to make Bertelsmann's turnover soar in the 1950s. Company turnover doubled each year between 1951 and 1953, going from DM7 million to DM30 million. This was a far greater turnover than that of any other book publisher in West Germany. In 1956--57, Bertelsmann was to break the DM100 million barrier. By 1973, Reinhard Mohn saw the figure reach DM1 billion. At the end of this 22-year period, the company employed a workforce of 11,000 at Gütersloh and elsewhere as opposed to an original 500 in 1951.

The success of the company could not be explained by the Bertelsmann Lesering alone. Two additional decisions taken by Reinhard Mohn were to be of great significance. The first, born from necessity, was to cover the company's enormous need for capital; Mohn made his employees shareholders, but without voting rights. This and other socially minded actions made the Gütersloh office, far from West Germany's glittering metropolis, a greatly envied workplace. Mohn's second decision was to branch out from books and invest in modern media such as records, magazines, and television to keep pace with changing consumer demands.

These changes all took place with breathtaking speed in the 1950s, 1960s, and 1970s. Most successful was the acquisition of a stake in the Hamburg publishing company Gruner + Jahr, which was gradually built up to a 74.9 percent shareholding in 1976. Not only did the Hamburg sister company bring in excellent results, owing to good management, but it also helped Bertelsmann achieve wider acceptance in the media world following a long period during which the Westphalian family business had been regarded as rather provincial.

The principle behind Bertelsmann's acquisitions was always the same. Reinhard Mohn bought firms that were active in related fields of business and which could be purchased relatively cheaply because of problems they could not solve themselves. He would place a couple of trusted colleagues in leading posts and leave them to work hard on their own. Delegation of responsibility and decentralization of business were his beliefs. For ambitious managers who valued a certain degree of independence, it was and remained a challenge. By 1994 Bertelsmann consisted of around 300 profit centers which operated virtually independently from one another and were coordinated from the group's headquarters in Gütersloh.

During the end of the 1960s, Bertelsmann reached the limits of its growth within the German-speaking world. Mohn decided to expand the business abroad. The first step was to introduce Bertelsmann's Lesering to Spain, with all the other sectors of operation--from the printing works to the book and magazine publishing companies--following at short intervals. As a result, turnover rose to DM5.5 billion by 1980 and the number of employees rose to 30,000 worldwide. Bertelsmann, transformed into a public limited company because of the colossal growth in its capital requirements, prepared to leap to the top of the media world league.

In 1981, after more than 30 years at the head of the company, Mohn moved from being chairman of the company to being chairman of the supervisory board. For the first time in Bertelsmann's history, Mohn left the operational running of the company to a manager who was not a member of the family. In taking this step he instituted a ruling which he applied to all members of the board and to himself and which would become company policy at Bertelsmann: employees may not remain in their jobs past 60 years of age.

Under its new boss Dr. Mark Wössner (a former assistant to Mohn, who had made his way to the top beginning in the late 1960s in the printing and industrial plant sectors), Bertelsmann AG held the position of the leading media group in the world for a time in the mid-1980s (until Time and Warner merged in 1989). This leadership role was made possible by several acquisitions in the United States, which stretched the Westphalian company to the limits of its capacity. Between 1985 and 1986 Bertelsmann acquired the publishing group Doubleday-Dell and turned the music section of RCA into the BMG (Bertelsmann Music Group). It was a massive package, for which Wössner paid more than US$800 million. This show of strength catapulted Bertelsmann AG's world turnover above DM9 billion, with the group employing more than 40,000 people worldwide.

Bertelsmann also looked to Eastern Europe, where possibilities had been revealed by the fall of the Berlin Wall and the Eastern Bloc. With world turnover of DM13.3 billion in 1989--90, Bertelsmann AG was well equipped to make the most of these developments. In 1990 alone, Bertelsmann spent DM1 billion in the newly opened eastern Germany, by starting a book club, buying the largest regional newspaper there, and acquiring in a joint deal with Maxwell, the publisher of Berlin's leading daily newspaper.

The company's major moves into the U.S. market did not immediately pay off. By 1992, 21 percent of Bertelsmann's sales originated in the United States, but only about ten percent of its profits. BMG's flagship RCA label was just breaking even, having gone through three presidents since the takeover and not having had a hit album since 1987's Dirty Dancing soundtrack. Although strong in the country and jazz niche markets, the label lacked a major performer in the contemporary music category, the most popular style of the time. Market share for RCA remained stagnant at about ten percent. BMG was helped by its Arista label, which was performing better than RCA and had a solid 1992 led by Whitney Houston's megahit soundtrack from The Bodyguard, which sold more than 20 million copies. Nevertheless, Bertelsmann was criticized for being too cautious when in early 1992 it was outbid by Britain's Thorn EMI in a battle for Virgin Records, which within two years could boast of signing such hit performers as Janet Jackson and Smashing Pumpkins. Other opportunities to bolster the BMG holdings were also missed, such as the bidding for A&M, Island Records, and Chrysalis Records.

In what became Bantam Doubleday Dell following the takeover, Bertelsmann had successfully turned around the Doubleday book club operations. Yet, overall, Doubleday had failed to turn a profit for Bertelsmann. Contributing to the book publishing operations difficulties, according to analysts, was Bertelsmann's haste in instituting changes at Doubleday, which alienated the industry establishment in the publishing capital of New York. Nevertheless, Doubleday author John Grisham had a string of best-selling suspense novels, one of which, The Client, became one of the fastest-selling books in publishing history.

In 1993 Bertelsmann restructured itself along product lines, reducing the number of divisions from seven to four: Books, which consisted of Doubleday and book and record clubs; Gruner + Jahr, which included all the magazine and newspaper publishing operations; BMG Entertainment, including music, television, and multimedia; and Bertelsmann Industry, which included printing, paper production, and other businesses. The goal of the restructuring was to instill more cooperation between different operations within the organization and to give the divisions more freedom to make decisions and increased investment authority. Each division was given its own board of directors, and with the exception of Gruner + Jahr the boards were of the British-American model--single boards comprised of insiders and outsiders--rather than the typical two-tier German model. This novel approach was intended as an attempt to combine the conservatism Bertelsmann had employed to cautiously build itself into a giant and the entrepreneurial freedom that its increasingly American competitors were so well known for.

Bertelsmann's debt remained very low into the mid-1990s, with a debt ratio of 16.3 percent for fiscal 1993--94. Cash would not be a problem for the divisions as they sought out growth opportunities. Overall, Bertelsmann spent DM1 billion (US$674 million) in acquisitions in 1995, most prominent of which were the purchases of a group of magazines from the New York Times Co. and the Italian music publisher Ricordi.

At the same time, in the area of multimedia, BMG Entertainment decided that rather than making acquisitions or developing products and services on its own, it would follow a strategy of partnering with the world's most innovative software developers. The earliest significant such venture was BMG's partnership with the leading American online service provider, America Online, to set up online services in Germany, France, and England. Bertelsmann financed the 50--50 venture with US$100 million and also gained a five percent stake in America Online with an additional US$50 million investment, while America Online agreed to contribute its knowledge gained through more than ten years in the business.

Overall, Bertelsmann was enjoying steady growth in sales and income and improving results in its U.S. operations in the mid-1990s. Moreover, on April 2, 1996, the company announced plans to merge its television and radio operations with those of Compagnie Luxembourgeoise de Télédiffusion (CLT), a Luxembourg-based broadcaster, prompting speculation that the resulting company would become Europe's largest television company and one capable of competing with Time Warner Inc. in Europe. With such merger plans in the making, Bertelsmann seemed poised to better its already enviable position in the media industry.

Principal Subsidiaries: Bertelsmann Club GmbH; Bertelsmann Lexikothek Verlag GmbH; Bertelsmann Online GmbH & Co. KG (50%); Blanvalet Verlag GmbH; EBG Verlags GmbH; Dr. Th. Gabler GmbH; GeoCenter Verlagsvertreib GmbH; Wilhelm Goldmann Verlag GmbH; Gruner + Jahr AG & Co.; Albrecht Knaus Verlag; Mosaik Verlag; Prisma Verlag GmbH; Prisma-Verlag GmbH & Co. KG; Reise-und Verkehrs Verlag GmbH; Schulverlag Vieweg GmbH; Ufa Film und Fernseh GmbH; Friedrich Vieweg & Sohn; Westdeutscher Verlag GmbH; Doubleday Australia Pty. Ltd.; Verlag Kremayr und Scheriau (Austria); BMG Ariola Belgium SA; BMG Ariola Music Ltda. (Brazil); BMG Music Canada; Doubleday Canada Ltd. (49%); BMG Ariola S.A. (France); BMG Ariola Musica S.p.A. (Italy); BMG Ariola S.A. de C.V. (Mexico; 75%); Doubleday New Zealand Ltd.; Circulo de Leitores (Portugal); Circulo de Lectores S.A. (Spain); Plaza y Janes S.A. (Spain); Bertelsmann Inc. (U.S.A.); BMG/Music (U.S.A.); Bantam Doubleday Dell Publishing Group, Inc. (U.S.A.); Bertelsmann Printing & Manufacturing Corp. (U.S.A.); Doubleday Book & Music Club (U.S.A.); Bertelsmann Music Group (U.S.A.).

Principal Divisions: Bertelsmann Industry Division; BMG Entertainment Divison; Books Divison; Gruner + Jahr Division.

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