Bertelsmann faces 50 shades of digital challenges

The success of the “50 Shades” erotic trilogy boosted Bertelsmann’s 2012 profit. Yet the media giant’s successful book publisher hides structural weaknesses. Many of the company’s markets are shrinking, and its many attempts to adjust to the digital age haven’t been convincing.

The fictitious adventures of Anastasia Steele and Christian Grey, the protagonists of the “50 Shades” erotic trilogy may have spared Bertelsmann’s management some nasty questions on declining profitability. The books’ global success helped boost operating profit at the German media group’s publishing unit, Random House, by 76 percent to a record of 325 million euros – 19 percent of group profit on only 13 percent of its revenue.

This stunning performance hides several structural weaknesses at Bertelsmann, whose overall operating profit fell 1.1 percent last year. The company still generates 80 percent of its revenue in Europe, and it operates in many declining industries like gravure printing or the production of CDs and DVDs.

Apart from Random House, all of Bertelsmann’s other divisions saw their profitability decline in 2012. Bertelsmann’s EBITDA margin, at 13.7 percent, is almost one third lower than that of German competitor Axel Springer AG. The company has warned that profit in 2013 could shrink further.

Bertelsmann lags behind in adapting to the digital age. While digital businesses at Axel Springer already generate 38 percent of all profit, the group from Gütersloh still makes most of its money from traditional businesses, notably its free-TV unit RTL Group, that are prone to future competition from the Internet.

After a lost decade, a new management team last year finally began the process of turning Bertelsmann into a more global, digital and faster-growing company. An intended merger of Random House with the UK’s Penguin is poised to create the world’s leading consumer publisher. And the full integration of digital music rights management firm BMG secures a small but profitable and fast growing digital business.

Further progress will be more difficult to achieve, partly due to Bertelsmann’s limited financial firepower. The group is still resisting the idea of an IPO and now wants to fund its transition from the sale of a 17 percent share of RTL. However, RTL’s stock market value has shrunk by a quarter since the plan was made public.

Given these limitations, Bertelsmann decided not to bid for the academic publisher Springer Science, valued at 3 billion to 4 billion euros. It is contemplating smaller acquisitions instead. That piecemeal approach spreads the risks but will also prolong the transition. In the meantime, Bertelsmann must keep hoping for yet another surprise bestseller.

This article was initially  published as a Reuters Breakingviews comment on 26 March 2013.


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