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Features
Bertelsmann's New Media Man Thomas Middelhoff has just taken
command of the world's most unusual media empire. He's a
high-tech guy with an old-fashioned notion: Books are content
too.
Marc Gunther
11/23/98
Fortune Magazine
Time Inc.
Page 176+
(Copyright 1998)
To find the leader of the world's third-largest media company, you get on a
plane to Frankfurt, take a connecting flight to Dusseldorf, and then drive for
two hours, at autobahn speeds, until you reach the city of Gutersloh, home to
163-year-old Bertelsmann AG and its newly minted 45-year-old CEO,
Thomas Middelhoff. Gutersloh (pop. 94,000) has shops, a theater, and four
movie houses, but cows graze just beyond downtown, and teenagers take a
bus to the nearest disco, 20 miles away. Middelhoff himself lives up the road
in a newly renovated country house with his wife, three sons, two daughters,
four dogs, two horses, chickens, and pigs. Lately he's taken up temporary
residence in New York, so he likes to come home and sit on an old wooden
bench that overlooks his swimming pool, garden, and duck pond. "It keeps
the mind clear," he says.
He's got plenty to think about these days. Last month Middelhoff became
Bertelsmann's CEO, succeeding Mark Wossner, 60, who stepped down after
leading the company through 15 years of robust expansion. With annual
revenues of $15.2 billion, more than Rupert Murdoch's News Corp. or
Sumner Redstone's Viacom, privately held Bertelsmann has quietly become a
global media behemoth--and one that, despite its roots in rural Germany,
generates more revenues from the United States than from any other
country. By acquiring Random House in March, Bertelsmann became the
U.S.'s largest trade-book publisher, owner of the Bantam, Doubleday, Dell,
and Knopf imprints, which publish authors from John Grisham and Danielle
Steele to John Updike and Toni Morrison. Its BMG Entertainment division
encompasses the Arista, RCA, and Windham Hill record labels, whose stars
include Whitney Houston, Toni Braxton, Puff Daddy, and the Dave Matthews
Band. With 60,000 employees, Bertelsmann's empire includes book clubs,
music clubs, newspapers, magazines, TV and radio stations, networks, and
online services in the U.S., Europe, Latin America, and Asia--300 individual
companies in all.
Curiously, Middelhoff has never run a media business. That makes him not
only the youngest of the CEOs sitting atop the world's great media empires
but also the least experienced. He made his mark at Bertelsmann as manager
of a printing plant. Then, as head of strategic planning he spearheaded a deal
that vaulted him past older executives: He persuaded the company to buy 5%
of America Online, then an unproven online service, for just $50 million.
Actually, Middelhoff tried to get Bertelsmann to buy twice that much, but his
bosses demurred. Now they wish they'd listened. "It was the best investment
we ever made," he says. Wossner's decision to place Bertelsmann's future in
Middelhoff's hands was a bit like that investment in AOL--a bet on promise
rather than on a proven track record.
Those who know him are convinced that Middelhoff is up to the job.
"Bertelsmann is a sleeping giant that's now going to emerge," says his friend
Steve Case, the CEO of America Online. "And Thomas will become one of
the best-known and most-respected media executives in the world." Already,
Middelhoff has shown that he will be a high- impact, high-profile CEO: He
was the driving force behind the Random House acquisition, which puts
Bertelsmann deeper into the printed word even as other media companies,
like Viacom and News Corp., are curbing their exposure to books. Recently
he negotiated an online partnership with Barnes & Noble that gets
Bertelsmann into electronic commerce, albeit well behind Amazon .com.
Middelhoff wants to expand his company's presence in music and magazines
in the U.S., and hints he might even get into the TV business here. "These
are my new friends, Bob Wright, especially, and Michael Jordan," says
Middelhoff, smiling, well aware that the CEOs of NBC and CBS would love
to find partners for their networks.
Unlike Time Warner, Viacom, or News Corp., though, Bertelsmann won't
go deeply into debt or pay a high premium for an acquisition. That is
because Bertelsmann operates under a set of conservative, self-imposed
financial targets that limit debt to no more than 1.5 times cash flow and
require an overall return on assets of 12%, which translates in its case into
profit margins of about 6%. (Because it's based on real pretax profits after
interest payments and depreciation, not Ebitda, this is a relatively high
hurdle for a media company.) The idea is to keep Bertelsmann out of the
capital markets and in control of its destiny. "We don't like to go to the
banks," Middelhoff says. "We want to be independent." Under Wossner the
company has consistently met its targets: Revenues have grown by 10% a
year, and net profits after taxes have grown by about 14% annually, reaching
$627 million during the 1998 fiscal year, which ended June 30. By retaining
most of its earnings, the company can afford to finance, say, the acquisition
of Random House, which cost about $1.1 billion. But Bertelsmann probably
couldn't pull off a deal on the scale of the Disney-ABC or Time
Warner-Turner mergers, even if it made strategic sense.
This aversion to debt is just one reason Bertelsmann--a company committed
to the printed word, dismissive of synergy, and immune to the gyrations of
Wall Street--can be fairly described as the world's most unusual media giant.
To understand Bertelsmann and its quirks, a brief history is in order.
Founded in 1835 by a printer named Carl Bertelsmann, the family-owned
firm prospered for a century as a regional publisher of religious books and
hymnals until it was shut down by the Nazis in 1944; its printing plant was
then flattened by Allied bombers. The task of rebuilding fell to Reinhard
Mohn, Carl Bertelsmann's great-grandson, who had just come home after
three years in a prisoner-of-war camp in Kansas; there, it is said, he became
fervently committed to the ideals of democracy and freedom of the press.
Studying American management, Mohn also came to believe that for a
company to prosper, its executives need to operate like entrepre-neurs. These
principles became the basis for Bertelsmann's famously decentralized
corporate culture, in which individual units not only operate autonomously
but occasionally battle one another.
"Reinhard Mohn may be the most important entrepreneur Germany has ever
had," Middelhoff says, "not just because of his economic success but because
he created an entrepreneurial culture combined with a sense of social
responsibility. Efficiency and humanity are not contradictions at
Bertelsmann."
Mohn brought home another good idea too--for a series of book clubs that
would make it cheap and easy for Germans to rebuild personal libraries that
had been destroyed during the war. The clubs were a great business and the
foundation for Bertelsmann's growth. (Today, Bertelsmann book clubs
worldwide have 26 million members.) During the 1960s and 1970s, Mohn
expanded his book clubs, publishing, and printing operations in Europe; he
also bought majority stakes in Bantam Books, Arista Records, and Gruner +
Jahr, a Hamburg-based magazine and newspaper publisher whose U.S. titles
now include Family Circle, McCall's, and YM. Influenced by the
conglomeration craze, Bertelsmann even owned Europe's biggest chicken
farm for a while.
Perhaps Mohn's greatest contribution to Bertelsmann was to donate nearly
70% of his shares to the Bertelsmann Foundation, insuring that the company
would remain in private hands. (Had Mohn, now 77, not given away his
shares, he'd be one of the world's wealthiest men.) This was a remarkably
selfless act; two of his sons work for the company, but neither has been
granted special privileges or reached top management. Mohn then surprised
his colleagues by retiring as CEO at age 60 in 1981, setting a precedent that
remains in effect, to Wossner's evident dismay. "I don't look like 60. I am
not 60," the silver-haired CEO tells FORTUNE, only half-jokingly. "Try to
play tennis with me or ski with me. You will see how old I am."
It was Wossner who orchestrated Bertelsmann's full-scale invasion of the
U.S. and the electronic media business. He bought Doubleday Dell and
merged it with Bantam; acquired RCA Records from General Electric and
combined it with Arista to form BMG, the Bertels-mann Music Group; and
leaped into European television in a major way. Briefly, before the 1989
Time Warner merger, Bertelsmann was the world's biggest media company,
although Wossner and Middelhoff say that's of no importance to them. Says
Middelhoff: "There's no reason to be the No. 1 media company, except ego.
But to be No. 1 in your respective markets means a lot." Like GE's Jack
Welch, Middelhoff wants Bertels-mann's business units to become market
leaders or get out.
Middelhoff's rise at Bertelsmann has been swift. Trained as an economist, he
worked in his family textile firm before joining Bertelsmann's "industry"
division as a management assistant in 1986. Barely two years later, after
revitalizing a small printing plant in Berlin, he took charge of Mohndruck,
the company's flagship printing factory in Gutersloh, with about 3,200
workers. He loved it. "What you learn is leadership. To run a factory you
have to lead people, day by day," he says. Wossner, who had also run
Mohndruck, was impressed, so much so that when the plant ran into trouble
because of low-cost competition from the former East Germany, he
promoted Middelhoff, partly to shield him from the carnage. Middelhoff had
to watch from the sidelines as wages were cut and workers were laid off.
"That made me crazy--and sad," Middelhoff recalls. "It was, for me, my
most horrible business experience."
By then Middelhoff had been named head of strategic planning and
multimedia. Fascinated by new media--he'd written his Ph.D. thesis on a
failing German online service--Middelhoff sought a partner with whom
Bertelsmann could launch online services in Europe. He met with Bill Gates,
among others, but picked underdog AOL. Says Steve Case: "Thomas had the
insight, before pretty much any other major media executive, that this was
going to be an important market, and he personally dived into it. It was a
leap of faith." Much of Bertelsmann's initial stake in AOL, bought for $50
million, has since been sold, for a total of $225 million; its remaining shares
are worth about $510 million. "If AOL were a flop, I would not be here,"
Middelhoff says. "I'm absolutely convinced of that."
His rival for the CEO job was Michael Dornemann, 53, a respected strategist
who did the Doubleday and RCA Records acquisitions for Wossner and now
oversees Bertelsmann's fast-growing music and TV businesses. Middelhoff,
the riskier choice, was the youngest member of the company's eight-member
executive board. "I had all these old tigers sitting around me, and he looked
like an assistant," Wossner recalls. "To them he was not the most qualified.
But they were wrong." Insiders say Wossner opted for Middelhoff because
of his youth and energy, his new-media savvy, and especially his ability to
lead--an essential in a far-flung, decentralized company populated by
strong-willed managers. "You can't order," explains Wossner. "If your
colleagues are ready to accept orders, they are the wrong ones. You have to
initiate. You have to inspire. You have to debate." Middelhoff, an engaging
man with a quick sense of humor, fit the bill.
Middelhoff was named CEO-designate on July 4, 1997. Fittingly, Wossner
told him to spend the next year in America because he'd never again have the
chance; that way he could immerse himself in Bertelsmann's fastest-growing
market, take English lessons, and get acquainted with his competitors. "I
knew nobody," Middelhoff recalls. He took up residence at the Sherry
Netherland Hotel on Fifth Avenue and methodically paid calls on his fellow
moguls: Murdoch, Redstone, Bob Wright, Time Warner's Gerald Levin,
Disney's Michael Eisner, and the rest. He's been the guest of honor at dinner
parties hosted by Bob Pittman of AOL, Tina Brown of Miramax, and
Washington insider Vernon Jordan, among others; and last summer
Middelhoff made his debut at the Sun Valley gathering of media and
technology moguls organized by investment banker Herbert A. Allen. Now,
Middelhoff says, "I don't know everybody, but I feel very much at home." |
