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Bertelsmann's online blitzkrieg
BY GEOFF SHANDLER Even in the relatively slow-paced world of book publishing, two weeks has not been enough time to thoroughly absorb the news that German media giant Bertelsmann A.G. had acquired Random House, the world's largest English-language trade publisher. The sale was, in the words of Publisher's Weekly, the "shocker of the decade," and it wasn't just the trade magazines that were astonished. The New York Times put the sale on its front page, superseded only by the news that Boris Yeltsin had fired his entire cabinet. The coverage was fittingly extensive in all of the nation's big papers, and, by midweek, most of the major details regarding the sale could be found in the Washington Post, Wall Street Journal, New York Observer and many others. Everyone asked the same question: Why would Random owner S.I. Newhouse sell? While Random's profits over the past few years were rumored to be flat, the company was still making money at a time when competitors like Simon & Schuster and HarperCollins were taking large write-offs and desperately trying to be bought. Newhouse was said to be eager to get his financial house in order before he and his brother Steve retire. (Steve helps oversee a Newhouse empire that includes, among other things, the New Yorker, the Condé Nast magazines, a newspaper chain and several cable TV ventures.) But in the end his decision may have come down to the simple fact that this was too good a deal to pass up. While the terms have not yet been announced, estimates have ranged between $1.3 billion and $1.6 billion. Since he acquired and assembled Random for relatively little, and since it has been profitable while he has owned it, Newhouse stands to gain a staggering return on his investment. (One newspaper estimated his return at well over 1,500 percent.) Noted one editor, "Nobody may be making great money selling books, but Newhouse seems to have done pretty goddamn well by selling a book company." Strangely, few reporters seemed curious as to why Bertelsmann would spend and expand so ambitiously at a time when the book business is weak. Most brushed off the question with clichéd comments about "economies of scale" and the efficiencies that were sure to result once the new entity downsized its back office staff (and perhaps some imprints as well). This superficial investigation into the "why buy?" angle may have occurred because, frankly, Random House and S.I. Newhouse are much more glamorous subjects than the relatively anonymous Bertelsmann. But it also happened because, while every piece quoted publishers, agents and authors, few reporters bothered to ask bookstore owners what they thought about the merger. Nor did they look closely at Bertelsmann or the background of Thomas Middelhoff, soon to become the CEO of Bertelsmann and the man truly behind the deal. Had they done so, they would have discovered not only the key to explaining why the deal really happened but also why it means so much more than just the merger of two publishing companies. Warren Cassell, the owner of one of America's best independent bookstores, Just Books in Greenwich, Conn., doesn't mince words about the deal: "I think it's the death knell for retail booksellers, both superstores and independents." Another bookseller was even more blunt: "The game is up. We lost." The reason for such despair has everything to do with Bertelsmann. "They love the direct sell," said a consultant involved with the deal. Indeed, almost 50 years ago Bertelsmann undertook its first major experiment in selling books directly to consumers by starting a book club called "Bertelsmann Lesering." Today, Bertelsmann book clubs have 25 million members around the world (the company has an additional 10 million members in its various music clubs). On Feb. 25, while still secretly negotiating the Random deal, Bertelsmann publicly revealed its plans to enter the online book retail business and go head-to-head against such established Internet booksellers as Amazon.com. Bertelsmann's Web site, provisionally called BooksOnline, plans to sell books from all publishers, not just those owned by Bertelsmann. If someone wants to order a book published by W.W. Norton (or any other non-Bertelsmann company), Bertelsmann would have to order it from the original publisher or a wholesaler, paying just over half of the cover price, before reselling it to the consumer. This wholesale discount may seem steep, but it still leaves room for the original publisher and wholesaler to make a tidy profit. If, however, someone wants to buy a book published by Bertelsmann, then Bertelsmann keeps not just whatever it charges above wholesale but the slice of profit usually retained by the publisher. That's not the only advantage. Most publishers estimate that at least 35 percent of the books they ship will end up being returned by bookstores (stores are traditionally allowed to return all unsold books for full credit). On many titles the percentage is much higher, which means publishers are paying to print and ship millions of books that end up coming right back to be pulped (publishing legend Alfred A. Knopf once summed up the process as, "Gone today, here tomorrow!"). Perhaps because their virtual inventory is greater (so consumers won't end up settling for something they're not sure they want) and returning is more of a hassle (you have to mail the book back on your own dime), online booksellers have a much lower return rate than bookstores. Thus direct sales may be the salvation of a big publishing company that has found itself overwhelmed by high overhead, high advances and a less than robust marketplace -- but only if the company is making and saving more with each direct sale than it would otherwise. The more books that are Bertelsmann's "own," the more slivers of direct profit and savings it captures. Looking at the deal this way, the acquisition of Random House and its enormous catalog of books makes great strategic sense. In fact, the deal may be less important as a publishing matter (it is, in the end, a case of one media colossus buying a company from another) than in a broader business sense: With this deal, the third largest media company in the world is placing a $1.5 billion bet on the power of the Internet as a retail marketplace. A closer look at Middelhoff, who masterminded the acquisition, offers a further clue as to how important the online angle is. Unreported was the fact that he has been fascinated with new media and the potential of selling directly for years. Indeed, his 1985 doctoral thesis was on precisely these subjects. Like many publishers, Random has dipped its toe into the online world, but it is at heart a very traditional publishing company. Bertelsmann, as the Economist pointed out this week in the one essential article on the whole deal, is at heart an aggressive marketer with substantial online experience (it already runs an online bookstore in Germany, and the company owns a major stake in AOL's European and Australian ventures). Random's strength has always been acquiring great books. Bertelsmann's strength has long been the targeted selling of the books it has. So while literary agents worry that the merger will result in lower advances for authors and critics moan about how the merger is yet another diminution of American cultural life, the real victim of Bertelsmann's actions will not be writers, their representatives or even Random's rivals. It'll be the many small bookstores that have for the past four years been struggling vigilantly against chains like Barnes and Noble and Borders. With this deal, a new model for big publishing emerges -- the vertically integrated publishing company. Of course, there's no guarantee that Bertelsmann's bet will pay off, but even Random House's rivals took some comfort in the German conglomerate's ambition. "Clearly they think there's a future in books," sighed one publisher. Just maybe not for bookstores.
Geoff Shandler is a book editor and writer who lives in New York. His last piece for Salon was on love and human heartbeats. Borders Books & Music is a minority investor in Salon. |
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