Bertelsmann wants to drop Sony Music

BERLIN — When Hartmut Ostrowski was an up-and-comer in Bertelsmann’s printing and services division in the 1990s, his bosses were discouraged from speaking at meetings of the top executives.

In the glamorous world of Bertelsmann, a global media empire with music, television, and publishing properties — Germany’s answer to Time Warner — services were viewed as strictly a backstage function.

Now, with Mr. Ostrowski at the helm of Bertelsmann, the stagehands are striding into the spotlight. Two weeks ago, he named Markus Dohle, a 39-year-old German who runs the company’s printing operations, as chief executive of Random House, the world’s largest consumer book publisher.

It is roughly akin to putting the head mechanic in charge of an entire airline. While Mr. Ostrowski, 50, acknowledges the risk of choosing an executive like Mr. Dohle, he is not about to apologize for the new focus on Bertelsmann’s nuts-and-bolts side, or for a strategic rethinking that will result in the company’s getting out of one media business, its American book clubs, and very likely a second, music.

For Bertelsmann, which has been home to legendary music executives like Clive Davis and literary tastemakers like the book publisher Sonny Mehta, Mr. Dohle’s promotion is just one part of a broader cultural makeover.

In coming days, Bertelsmann plans to intensify talks with the Sony Corporation about selling its half of Sony BMG Music Entertainment, the joint venture started in 2004, according to people with knowledge of the talks.

Mr. Ostrowski declined to comment on the future of the music partnership, as did representatives of Sony BMG. Bertelsmann has often said it could be either a buyer or seller in the joint venture.

But Mr. Ostrowski, who wins praise from his colleagues for his straightforward style, did not mince words about the industry. “The good thing is, more people are listening to music than ever before,” he said. “The bad thing is, it is not easy to monetize it.”

Mr. Ostrowski knows he is viewed by critics inside and outside the company as an agent of retreat: pulling Bertelsmann away from the dazzle of recording stars like Alicia Keys to the humdrum world of offset printing and call centers.

He flatly rejects that thesis, declaring that Bertelsmann will remain a player in media and in the United States. “There’s no doubt we will continue to build our media businesses,” he said in an interview at Bertelsmann’s stately office in Berlin, which resembles a Prussian army headquarters. “We are, and will continue to be, a media company.”

Still, while Bertelsmann has struggled with weak advertising and consumer spending, not to mention the migration of traditional media to digital distribution, Arvato, its services arm, has chugged along — generating a quarter of Bertelsmann’s $29 billion in annual sales.

In addition to printing plants in Europe and the United States, Arvato runs call centers for Lufthansa, handles billing for ads on Google, and manages public services for cities in Britain and Germany.

“The service business is good for our media business; we can be proud of it,” Mr. Ostrowski said. “It spreads our risk and gives us opportunities that other media companies don’t have.”

While he declined to say how much of Bertelsmann’s revenue would come from services in a decade, it is clear its share will rise significantly as the company sheds media assets. But the strategy carries considerable risk, according to observers, as well as several current and former executives.

“Bertelsmann has always had executives rising out of Arvato, but now everyone is coming from Arvato,” said Thomas Schuler, a German journalist who has written a book about the company.

Besides Mr. Dohle and Mr. Ostrowski, Gunter Thielen, chairman of Bertelsmann’s supervisory board, came from Arvato, which is based in Gütersloh, the dozy Westphalian town where Bertelsmann is based. Though Arvato operates around the world, its bosses share a worldview that is, if not parochial, then rooted in a particular place.

Mr. Dohle, for example, once joked with a local journalist, Stefan Brams, that he built his home in Gütersloh so close to the printing plant that he could hear the roar of the presses.

By living near the headquarters, executives said, Mr. Dohle was also on hand for social gatherings, like Bertelsmann’s annual spring party, that brought him into contact with the family of Reinhard Mohn, which controls the company and played a role in his appointment.

In dispatching Mr. Dohle to New York, Mr. Schuler said, “Ostrowski is trying to establish somebody loyal to him there, so he really has someone he knows and he thinks that he can trust.”

Like other Arvato-trained executives, Mr. Dohle is known for his entrepreneurial zeal, according to people who know him. On his desk is a corporate motto that translates as “Make it simple. Just do it.” The question, observers said, is whether Mr. Ostrowski can transplant that kind of drive to Random House without harming its creative culture. Some doubt it.

“He is losing the cultural core of Bertelsmann,” said a former senior executive, who spoke on condition of anonymity because he did not want to criticize Mr. Ostrowski publicly.

The makeover of Bertelsmann dates back to 2002, when the Mohns, led by the family matriarch, Liz Mohn, forced out their ambitious chief executive, Thomas Middelhoff, in favor of Mr. Thielen (Mr. Middelhoff, now chief executive of Arcandor, is a board member of The New York Times Company). It has accelerated under Mr. Ostrowski, who took over in January and has embarked on an unsparing review of Bertelsmann’s diverse assets.

First to go will be the company’s money-losing North American book clubs. Bertelsmann has retained Morgan Stanley to solicit bids for the unit, and hopes to select one by the end of the summer, according to the chief financial officer, Thomas Rabe. Second, perhaps, will be Bertelsmann’s share in Sony BMG, depending on how the talks go.

Mr. Ostrowski is clearly not satisfied with the performance of those businesses. With the exception of the RTL Group, Bertelsmann’s highly profitable European television and radio group, all of the company’s media divisions reported lower sales and profits in 2007.

The deteriorating results at Random House were one reason that Mr. Ostrowski pushed out Peter W. Olson, the chief executive. Bertelsmann did not conduct a conventional search for his successor, executives said, and passed over a natural choice, Gail Rebuck, who heads Random House’s British division and has delivered profits while other units lagged.

Her handicap, they noted, was that she is British and does not speak German, unlike Mr. Olson, an American who speaks fluent German and took part in meetings in Gütersloh with ease.

Acknowledging that his choice had raised eyebrows, Mr. Ostrowski said he appealed to the publishers of Random House to give Mr. Dohle a chance. Some at Bertelsmann liken him to a young Mr. Middelhoff, an unpolished gem who grew into a charismatic media executive.

In Los Angeles last week, Mr. Dohle had a coming-out party at the industry trade fair, BookExpo America. He mingled easily with Mr. Mehta and Barbara Walters, whose memoir was recently published by Knopf. Asked what kind of books he reads, Mr. Dohle cited “You’re in Charge, Now What?” a management book by Thomas J. Neff and James M. Citrin, published in 2005 by Crown Business, a Random House imprint.

Quaffing cocktails on Melrose Avenue is worlds away from Gütersloh, where Arvato functions as a sort of engine room for Bertelsmann’s more glamorous businesses. Its sales have grown 73 percent since 2003, to $7.6 billion, though profits were flat last year. Arvato has made inroads into new areas like municipal administration, where it essentially takes over services like car registrations and even tax collection from local authorities.

In the Bavarian city of Würzburg, Arvato operates an Internet site that is designed to allow citizens to carry out an array of bureaucratic chores from home. With strained budgets in cities and towns across Germany, Bertelsmann believes this could be a vast new market.

But it is not without risk. Opposition leaders in Würzburg criticized the Arvato contract, saying other arms of Bertelsmann could misuse private data it got as a result of its municipal work. The city’s mayor, who had championed the project, was voted out of office recently.

Skeptics also point to a privately owned German mail-services company, the Pin Group, which fell into deep financial trouble after the government introduced a minimum wage for postal workers.

As Mr. Ostrowski looks for ways to jump-start Bertelsmann, some say he will be hamstrung by a balance sheet that carries about $10 billion in debt — a legacy of the company’s buyout of its sole outside investor, Groupe Bruxelles Lambert, in 2006.

Mr. Ostrowski said Bertelsmann could spend 5 billion euros to 7 billion euros on acquisitions over the next five to seven years — too little for a blockbuster deal, but enough for its ambitions.

“We are not looking to be the biggest media company,” he said. “We are looking to be the best.”

[NYTimes]