$2bn bet on future of books

THE book publishing deal of the decade was hatched at the 70th birthday party of SI Newhouse, the legendary New York publisher, on 7 November. Thomas Middelhoff, chairman designate of Bertelsmann, the German media giant, half-jokingly asked Mr Newhouse to sell Random House, the family-owned book publishing business. To his surprise, Mr New- house said: "Give me a week to think about it."

Last week, Bertelsmann unveiled the purchase of Random House for a sum rumoured to be between $1.6bn (pounds 900m) and $2.5bn. It creates by far the largest book company in the world, with turnover of $2bn.

The sale of a leading American literary publishing house - whose authors include John Updike, William Faulkner and Gabriel Garcia Marquez - has caused widespread concern in the US about editorial independence. In Britain, Random House owns 42 imprints including Jonathan Cape, Hutch- inson, Heinemann, Vintage, Century and Arrow; its distinguished list of contemporary British authors includes Martin Amis, Julian Barnes, Peter Ackroyd and Louis de Bernieres.

Bertelsman's purchase of the big American publisher flies in the face of the current belief that electronic media will replace the book in many domains.

But the departing Bertelsmann chairman, Mark Wossner, said: "The deal underlines Bertelsmann's belief in the very promising future of the book."

After Disney and Time Warner, Bertelsmann is the third largest media conglomerate in the world, with interests in printing, magazine publishing, new media, music and television. Books, its original business, are still very significant and account for DM7bn (pounds 2.3bn) of its DM22bn turnover.

Bertelsmann's book division, which includes Bantam Doubleday Dell, has performed consistently well, unlike competitors such as HarperCollins, owned by Rupert Murdoch's News Corporation, and Penguin, owned by Pearson, which have suffered setbacks in recent years. Estimates suggest the division achieves annual profits of DM700m, significantly better than Random House which earned profits of $70m on sales of $1.2bn in 1996.

Bertelsmann expects to raise Random House's performance by improving its terms of trade with its main customers, the giant US book retailers such as Barnes & Noble and Borders and amazon.com, the internet bookseller. Moreover, it anticipates savings in distribution, marketing and production.

Bertelsmann said this cost cutting would not, undermine its commitment to editorial independence. But it will be tough to make the deal work without interfering.

In Britain, the record of publishing mergers is poor. There have been a number of failures, none more spectacular than Robert Maxwell's $2bn purchase of Macmillan. Reed's expensive foray into consumer publishing ended in a humiliating withdrawal, while HarperCollins has been a poor invest- ment for News Corp.

Bertelsmann is intent on doing things differently. Earlier mergers mostly started with the loss of editorial staff and the merger of imprints. By contrast, Bertelsmann is committed to managing its publishing houses as autonomous profit centres. Its spokesmen in New York and Munich suggest that its British publisher, Transworld, will operate separately from Random House. How that will produce the needed cost savings remains to be seen.

Both managements have praised each other fulsomely, but Bertelsmann and Random House are very different companies. The largest paperback publisher in Germany, Bertelsmann's strengths are in non-fiction and commercial fiction - it publishes few of the leading literati; the mainstay of its USbusiness is John Grisham, while Transworld has flourished with authors such as Jilly Cooper, Catherine Cookson, Mary Wesley and Joanna Trollope. Making similar margins out of Random House's more upmarket list will be a challenge.

Despite ownership by a charitable trust, Bertelsmann is a highly successful commercial organisation. It owns one of the world's largest music companies, BMG; one of its subsidiaries is a big magazine pub- lisher whose titles include Stern, Brigitte and Family Circle; it is one of the largest European television companies; and it is a leader in new media, with a stake in America Online.

This makes Bertelsmann's commitment to book publishing even more surprising. Books are an inherently less attractive business than modern media. Markets and rights are regional, not global; printing and distribution costs are high compared with digital reproduction and transmission. And success is difficult to achieve.

Bertelsmann has a lot to prove.