The Book On Bertelsmann

In the gossipy literary circles of New York City, the half-life of an industry secret is generally the next lunch. That’s why the announcement last week that German media titan Bertelsmann AG was buying Random House was doubly shocking. Hardly anyone knew that the venerable American publishing institution, a supposedly sacrosanct division of Advance Publications, was for sale. The estimated $1.4 billion deal was negotiated surreptitiously over four months. Indeed, many Random House staff members found out about it by reading the morning newspaper.

The sale makes Bertelsmann, based in Gutersloh, Germany, the leader in American publishing. It’s just more evidence that in a world of global-media companies, assets don’t care what address they call home. Bertelsmann, known for its hands-off reputation with its other U.S. publishing division, Bantam Doubleday Dell (BDD), will maintain the Random House name and keep the editorial operation independent. But the new two-volume division will get much greater leverage with agents, authors and booksellers.

The buyout buzz eclipsed even the National Book Critics Circle Awards handed out last week. The combined company will hold 23% of what the industry calls trade books, the nearly $7 billion of nontechnical titles bought by general readers. The company, with $1.8 billion in revenue, will be double the size of the next largest house, Simon & Schuster. “We’re all as surprised as the rest of the world,” says Jack Romanos, a top Simon & Schuster executive. “To be perfectly honest, I’m not sure we understand what it means yet.”

In selling a family jewel, Samuel I. (“Si”) Newhouse Jr., chairman of Random House’s parent company, Advance Publications, proved that he could read a market as well as a book. And publishing is not a pretty story. Costs have been skyrocketing in a market shaken by high advances, torpid sales and power struggles with superstore book chains. In a statement, Newhouse said the company had reached a “decision to focus its efforts on the management and expansion of its core business of newspapers, magazines, business journals and cable.”

On the other side of the Atlantic, Bertelsmann had been quite vocal about its intention to acquire another U.S. company. The Germans perused the profit and loss statements of Simon & Schuster, owned by Viacom, and of HarperCollins, controlled by News Corp., but couldn’t make a deal. For Bertelsmann, the world’s third largest media company, the merger immediately establishes a long-sought commanding presence in the U.S., the world’s largest media market. “Random House is a dream for Bertelsmann,” says Thomas Middelhoff, 44, who engineered the deal just six months before officially stepping into the CEO’s job. “I was as surprised as everyone else,” says Sonny Mehta, president of Knopf, a prestigious Random House division. “I thought about it and said it’s a very logical partner to have.”

Mehta’s new partner is 163 years old. Bertelsmann has quietly expanded from its origins as a publisher of Christian songs and prayers into a global-media conglomerate. The company owns three of Germany’s national television networks, and its alliance with AOL created one of the largest online services in Europe. The company also plans to start an online bookstore to compete with Amazon.com It recently developed and will test a voice-over Internet service in several European countries, giving Bertelsmann the means to deliver all its own content.

Unlike Advance, Bertelsmann occupies a position in publishing that makes it a logical buyer of book companies. The firm, which published the Brothers Grimm in the 19th century, is vertically integrated, with everything from a printing company to a book club. “Other corporations don’t view trade publishing as a core business,” says Bertelsmann’s Peter Olson, 47, who will become chairman and CEO of the new Random House. “We do; we believe in books; they are not a stepchild.”

The acquisitive Middelhoff picked up Random House as if it were a souvenir. Last fall he came to the U.S. to study English and learn about the American publishing industry. At a 70th-birthday bash for Si Newhouse, he mentioned to the birthday boy that if Advance were ever interested in selling Random House, Bertelsmann would be interested in buying. A week later the clandestine deal, code-named Project Black, was under way.

The merger raised the usual outrage about media concentration, with a dose of cultural xenophobia thrown in. But it comes at a time when the entire industry is struggling. While more titles are being published (68,000 in 1996), hardcover sales of adult trade books slipped nearly 7% from 1996 to 1997, and overall sales dropped 3.4%. Under corporate ownership, the cultural appeal of books began to give way increasingly to bottom-line considerations. Media czars, expecting books to yield the same 15%-to-20% profits as their other content businesses, have become impatient with their publishers’ balance sheets, which seldom return more than 10%.

“Publishing has changed profoundly over the past 30 years,” says Morgan Entrekin, publisher of independent Grove/Atlantic. “It has gone from being entrepreneurial, impresarial and academic to being run like a media business. I know I will lose money on half my front list, but those are my favorite books to publish.” Significantly, Grove/Atlantic never had a No. 1 best seller until Cold Mountain, last year’s breakout hit by first-time author Charles Frazier.

Today’s books are more like grocery products than works of literature. Publishers scrutinize an author’s sales history, and before buying a new title they consult with the marketing and sales departments about the book’s chances. They are less likely to spend money to nurture an author. At retail, booksellers can track the success or failure of an author when deciding whether to stock a book or display it. And bookstores have the option of returning unsold books. In the past five years, the percentage of adult hard-cover books returned has increased from 29% to 36%, according to Book Publishing Report.

Big advances given to float best sellers have contributed to the publishing slump. “A $1 million advance is not a shocker anymore,” says Peter Breen, managing editor of Book Publishing Report. Ironically, it was Newhouse who developed the high-price strategy, says Thomas Maier, author of Newhouse, on the theory that, as in Hollywood, the hits could carry the dogs. “He became a victim of this theory and opened the door for media conglomerates to enter the world of book publishing,” Maier notes.

To cope, publishers have been scaling back. HarperCollins roiled the authors’ camp when it canceled more than 100 manuscripts in June to help clear its debt. And many other houses have quietly been pruning their lists. “I’ve been publishing for 18 years,” says Jane Smiley, Pulitzer Prize-winning author of A Thousand Acres and the upcoming The All-True Travels and Adventures of Lidie Newton. “Every time something happens, people say to me, ‘It’s a good thing you came in when you did.’ But publishing is always in turmoil.”

Into the current Sturm und Drang comes the Bertelsmann deal. “The decision of what is on the shelves is in the hands of a few,” laments Paul Aiken, executive director of the Authors Guild. “This is consolidation in a major and disturbing way.” Industry alarmists are concerned that advances are sure to dwindle when BDD and Random House are no longer competing for books. Bertelsmann disagrees. “I’ve heard much concern about advances in the past six years,” says new Random House head Olson, “and they have only moved in one direction.” North. Facing his critics, he says, “We are not looking to cut back on imprints but to diversify. We brought out 1,500 new titles in North America last year.”

Bertelsmann is now one of the largest non-American players in the American media scene. In addition to BDD, its U.S. holdings include music labels such as RCA and Arista and magazines such as McCall’s. The company plans to raise not only its U.S. profile but its revenue too, from a third of its bottom line to 40%. “The U.S. is a very big market,” says Middelhoff. “Our position is O.K., but our properties must strengthen our position.”

And what might that mean? Middelhoff doesn’t mince words. “Random House is a case study,” he says. “We’d like to do it again with a music label.” Maybe on his next trip.

–With reporting by Andrea Sachs/New York and Peggy Salz-Trautman/Gutersloh