*Bertelsmann Restructures to Meet Internet Challenges

GUETERSLOH, Germany — Media giant Bertelsmann, shaken by the AOL-Time Warner merger, and Time Warner's takeover of EMI, is struggling to restructure the business and make it more competitive on the Web.

“Content is king,” CEO Thomas Middelhoff cites almost as a mantra of Web-based growth, and points with pride to his company's Web-based turnover of 1.6 billion Deutschmarks (roughly $900 million). Only AOL and Amazon, he told German media, sell more online.

Nevertheless, he has problems with outlets not unsimilar to those faced by Time Warner when it agreed to the AOL merger: How is he going to get that content out there where it will be most profitable.

AOL is a problem. The two companies were close. AOL-Europe, for example, is a joint venture that has 2.8 million subscribers across Europe. And in 1998, the two firms launched a second joint venture — AOL Australia. Even before he became CEO, Middelhoff in 1995 wanted to buy a 15 percent stake in AOL but his board pushed it down to 5 percent. When he sold most of it last fall, the value had skyrocketed, giving him a stake of $700 million, and $1.2 billion over the last 18 months.

Still, he had clearly hoped to get together with AOL on a more permanent basis before Time Warner stepped in. Middelhoff promptly quit AOL's board but insists he is not going to sell his stake in AOLEurope. Just before British wireless telecom giant Vodafone finally overwhelmed Mannesmann, a German rival, there was media speculation that Middelhoff wanted to bring Mannesmann into AOL Europe, but now that deal is dead.

The idea is not. Bertelsmann is still looking, and not just strictly on the Internet. EMI had been targeted as a possible acquisition for BMG. Now industry reports talk of a possibly BMG-Sony combine to become the world's No. 1. Understandably, Bertelsmann spokesmen have been tight-lipped, their remarks ranging from “no comment” to “nothing has changed.” But something clearly has, namely the organizational structure.

Starting next year, the company's extensive book business will be U.S.-based and under the Random House label. Individual imprints from Knopf and Pantheon in the U.S. to the Bertelsmann Verlag in Germany will be marketed under their traditional label. But Peter Olson, an American, will join the Bertelsmann board and be charged with developing publishing activities worldwide. Random House is already the largest English-language publishing group.

Bertelsmann has a strong market position at home in Germany and is solidly established in the Spanish-language book business. Future plans call for publishing expansion in Asia, Eastern Europe and Latin America. They will be directed from New York because the company's publishing activities earn 70 percent of their revenue in North America. Moreover, the move solidifies Bertelsmann's claim of being an American-European company.

But the leading edge Internet enterprise will be gathered into the “Bertelsmann Direkt” group together with a host of other activities ranging from book clubs in the United States, Europe and Latin America, and Web-based book shops — BOL in Europe and BN.com in the U.S. — to multi-media.

These include AOL Europe, CompuServe, Pixelpark, a Web site designer taken public with great success last fall, and what a Bertelsmann press release described as “other new media properties.” Klaus Eierhoff, another board member, who has been running the new media division, principally BOL — Bertelsmann on line — will be in charge of the Direkt division which will also include regular DM activities.

Middelhoff is adamant on one thing: He will not take the company public, but he will spin off profit-making divisions like Pixelpark onto the stock exchanges in order to bolster his Internet war chest.

Size, he argues, is beside the point. “Big fish don't necessarily always eat little fish,” he told a German newspaper last month. “In this business the fast eat the slow.” And, he told the New York Times he wasn't interested in battleships but in a fleet of fast frigates.

It's a policy he demonstrated last month by taking stake in Taiwan's Internet leader Yam. Microsoft is another investor. But nobody has asked that question yet.

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