Bertelsmann Plans to Get Out of E-Commerce

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Amazon.com has played David to Bertelsmann AG's Goliath, prompting the German media and publishing giant to look to sell its BOL online operation in Europe in favor of refocusing on its book and music clubs.


"We don't believe that we could become the No. 1 worldwide or in those countries in which Amazon is in today," said Gerd Koslowski, vice president of corporate communications at Bertelsmann's DirectGroup, Guetersloh, Germany.


The irony is that Amazon is among the companies reported to be in discussions with Bertelsmann to buy some or all of BOL's operations in Germany, Switzerland, Sweden and the Netherlands.


Koslowski was coy about any discussions with Amazon, saying, "I don't want to confirm that. We have contacted many competitors." But he admitted that Seattle-based Amazon could be one of the parties Bertelsmann is talking with.


Amazon would not comment.


"We do not respond to rumors about discussions that we may or may not be having," said Bill Curry, director of communications at Amazon. "It's a long-standing practice."


So, why has Bertelsmann admitted defeat?


"The fact is that Amazon has a huge advantage today," Koslowski said. "Amazon is the No. 1 [online bookseller] worldwide today. If you look at the German market, for example, it's four times bigger than BOL in Germany. So they have a first-mover advantage and better cost structures than we have in Europe. DirectGroup, as a whole, is not profitable today ... and we really have to focus on those businesses where we have a good future."


Koslowski is referring to DirectGroup's book and music clubs. With nearly 40 million members worldwide, including Bookspan and BeMusic in the United States, it is the global market leader in clubs.


The decision to depart from e-commerce follows the July resignation of Thomas Middlehoff as Bertelsmann's chief executive. Middlehoff was an ambitious high-flier who was ousted and replaced by Gunter Thielen, who also serves as chairman. Middlehoff was responsible for investments in online ventures like Barnes & Noble.com, CDNow.com and Napster. A music-sharing site, Napster recently closed for good after a court ruled Sept. 3 against its sale to Bertelsmann. The online ventures have yet to turn a profit.


"They don't have the patience that Middlehoff had," Alan Alper, senior analyst at Web consultancy Gomez Inc., Waltham, MA, said of Bertelsmann's new management.


Another reason for the planned divestiture is BOL's effect on the direct division's bottom line. BOL's 2.5 million customers in Europe and China last year accounted for $93 million, about 3 percent, of the DirectGroup's $3.7 billion in revenue. But for the six months through June 30, DirectGroup lost $118 million over sales of $1.3 billion. BOL operations alone are expected to post a $39 million loss this year.


More galling, DirectGroup performed the worst last year among Bertelsmann's seven operating divisions. The company's other constituents include book publisher Random House, Gruner+Jahr magazines, BMG music, broadcaster RTL Group, printing and distribution arm Arvato and trade group BertelsmannSpringer, which also may be sold.


The decision to drop BOL comes one month after Ewald Walgenbach took over DirectGroup, replacing Klaus Eierhoff.


Bertelsmann has four options, Koslowski said.


First, find a buyer for BOL. If that fails, encourage a management buyout of the operations in each country. And that should not be such a bad deal: BOL is No. 2 in the German online bookselling market with a 13 percent share versus Amazon's 49 percent. It leads in Sweden and the Netherlands, where Amazon is not active.


A third option is to transform the online bookstores into book clubs, just like the fate of the British BOL. Though book clubs may not be a thriving proposition in the United States, the concept finds favor in Europe.


"In parts of Europe that are more conservative and old-world, it probably will go ad infinitum," Alper said. "In the States and some of the more progressive quarters of the world, it certainly has seen better days. Books are still more apt to be bought rather than music. I think the music clubs are probably in more danger. I would have to say because of the digital aspect, music has a shorter life in clubs than books in that digital publishing hasn't taken on among book distribution via the Web."


At worst, BOL will be shut down if the other options seem unpalatable and buyers far from the shore.


It does not help that Bertelsmann's home market is mired in recession.


"Retail in Germany is not in a good shape, and the book industry as a whole has decreasing revenue," Koslowski said. "With this competitive environment and then looking at the fact that with our club business, which we've had for 50 years, you come to the decision, 'Let's focus on the core business.' "


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