Germany's sleeping giant

GÜTERSLOH IS an unlikely base for a global media giant. Express trains pick up speed as they approach the platforms of the town's small railway station; the nearest international airport is two hours' drive away. Set in the endless potato fields of north-west Germany, Gütersloh is the kind of place where everybody goes to bed at eight, maybe because the only obvious entertainment is the video arcade in the short, pedestrianised street which doubles as the town centre. Thrill-seekers are drawn to the bright lights of Bielefeld 20 miles away. No, you would not guess this is the town where the largest publisher of English literature is based, the world's fourth biggest media concern.

GÜTERSLOH IS an unlikely base for a global media giant. Express trains pick up speed as they approach the platforms of the town's small railway station; the nearest international airport is two hours' drive away. Set in the endless potato fields of north-west Germany, Gütersloh is the kind of place where everybody goes to bed at eight, maybe because the only obvious entertainment is the video arcade in the short, pedestrianised street which doubles as the town centre. Thrill-seekers are drawn to the bright lights of Bielefeld 20 miles away. No, you would not guess this is the town where the largest publisher of English literature is based, the world's fourth biggest media concern.

This is where Bertelsmann began more than a century ago, and from its campus- style headquarters in Gütersloh brands as wide-ranging as Germany's Stern magazine, the pop group Backstreet Boys and the top American book publisher Random House are controlled. Bertelsmann is not a household name even in Germany, where market research found most people thought the company was in the holiday business.

For 100 years it printed Bibles and hymnals, and did not diversify until after the Second World War. But a series of energetic acquisitions has bought into some of the biggest brand names around the world. This year, for the first time, its US revenues overtook income in the home market. Bertelsmann has become a truly global company, but not one intent on world domination. Bertelsmann's chief executive, Thomas Middelhoff, says: "There is no strategy at Bertelsmann to create a monopoly. We would like to be the best in the market, if possible, but not the only ones."

But it is just as well British forces bequeathed a small airport to Gütersloh. It shortens commuting time for Bertelsmann executives, who are ferried on company jets to Heathrow for a connecting Concorde to New York. Board members, such as Michael Dornemann, chairman of the entertainment division, have two homes, and divide their time between US and German offices. "Our roots are in Gütersloh," says Mr Dornemann. Bertelsmann is the biggest European provider of free television, but its US interests in this domain are limited.

To most other board members, Gütersloh must appear quaint. The one exception may be Siegfried Luther, the chief financial officer, who is a direct descendent of Martin's brother, and an emblem for the company's solid Protestant tradition.

But hymnals do not make money any more, and nor do books, which founded the company's post-war fortunes. Bertelsmann is facing its biggest upheaval since its owner, Reinhard Mohn, returned from his Kansas POW camp after the war intoxicated with American ideas of running a business. He transformed the cottage industry into a modern media company, propelled by profits from its book clubs. Mr Mohn still pulls the strings from the background. Some fringe activities are being floated off, but there is no question of selling shares in Bertelsmann itself. They are controlled by two foundations and the Mohn family.

The company is not a one-man band, despite its feudal appearance, nor does it have a centralised structure. The divisions have enormous autonomy, although arguably sometimes too much for the company's good. The executives and staff are encouraged to think for themselves, and decisions are reached, in true German manner, by consensus. "We are a home for artists and talent," says Mr Middelhoff.

The CEO, who says he is "an American at heart", represents either the biggest threat to Bertelsmann's future prosperity or its only hope, depending on who one talks to in Gütersloh . He was appointed a year ago, on the basis that only he in the high command displayed true entrepreneurial spirit and had an understanding of the role of the Internet in the media of the future. It says a great deal about the management, that when Mr Middelhoff suggested buying into America Online a few years ago, his colleagues took him for a clown. The 5 per cent he bought has proved the most profitable acquisition. Now 46 and obsessed with computers, he was regarded as an eccentric, and not just because he had a habit of cracking jokes at board meetings. As he demonstrated with the AOL purchase, upon which his career depended, he is a risk-taker. Unlike his colleagues, he is at ease speaking English in New York's media village, and instead of fearing technological development, he relishes it. He sees Bertelsmann as a global concern selling its wares via its own electronic shopping mall. He admits it was caught napping by the Internet age. "We were too slow, no question about it," Mr Middelhoff told Der Spiegel . "We should have dealt with Amazon a year earlier; three months on the Internet is equivalent to a year. But we debated the question of responsibility for too long: who should be in charge - multimedia, book publishing, book clubs, or distribution?"

In the last financial year, as the book division struggled and was forced to lay off staff, the company's multimedia activities expanded by 53 per cent. The future, as Mr Middelhoff sees it, is digital. All books and music will be eventually digitalised and marketed through the electronic gateways of Bertelsmann Online and barnesandnoble.com, in which Bertelsmann has a 50 per cent stake. To ensure senior colleagues understand virtual technology, he instructed them to send all memos to him by e-mail.

For some of the folks in Gütersloh, such new-fangled gimmicks are a burden. Many remain unconvinced of the alleged benefits of e-commerce, and complain that the company's core businesses are allowed to wither away while Mr Middelhoff boldly leaps into the unknown. A Kulturkampf - ideological battle - has erupted at the campus, pitting traditionalists against modernisers. At one level, the struggle is strictly internal. Bertelsmann has long been a loose federation of autonomous republics: divisions pulling in all their separate ways. As long as they generated profit, they were free to do as they liked, including doing deals with companies that were in direct competition with other Bertelsmann divisions.

Mr Middelhoff's "cultural revolution" will link activities more closely through e-commerce, while paying lip-service to decentralisation. There is little room for autonomy in a streamlined company. More importantly, the direction Bertelsmann is heading would seem to make those valued roots in small-town Germany an irrelevance at best, and a burden at worst. This very German global company is schizophrenic about its identity. While the top executives take crash courses in English, the rest of the company is steeped in German tradition. Bertelsmann's PR department, for one, has to be one of the most user-unfriendly even in the dozy setting of corporate Germany.

They are guarded, presumably, because of the history. That did not matter while Bertelsmann was an obscure yet powerful German giant. But after taking over Random House last year, questions are being asked about the years between 1933 and 1945. It has been revealed that Heinrich Mohn, the father of the current patriarch, was an SS member, and his company published some repulsive literature, including anti-Semitic tracts. After this was unearthed last year, Bertelsmann entrusted an independent historical commission to look into its past. The findings will elicit interest in New York. Bertelsmann's official history says it was closed by the Nazis near the end of the war because it refused to toe the line.

This is the sort of publicity Bertelsmann does not need as it continues to diffuse its German identity by devouring Anglo-Saxon companies. Nor does its essentially German big-company culture sit comfortably in the competitive environment it has chosen. If Mr Middelhoff is right, and the future is electronic, then slow-moving behemoths will find it increasingly difficult to keep up with smaller, nimbler competitors. Especially if such a corporation operates from a German backwater. The chief executive insists: "The European-American media house with German roots - that's what Bertelsmann is - is developing into a magnet for creative entrepreneurial talent and media consumers. In a few years there will be one or two non-Germans on the board."

Analysts say Bertelsmann owes its phenomenal success to good distribution, and disciplined attacks on each of its markets. But now it has stepped out of this environment, dangers lurk. The rules in the big, wide world are different. Mr Middelhoff says media-world mega-mergers are a thing of the past, because competition comes from Internet start-ups that can change the face of the industry within months. In Gütersloh, they have to keep an eye on Silicon Valley.

So far, there is no evidence that Bertelsmann can keep up. The company, caught napping in the early days of the Internet revolution, is frantically trying to catch up. Almost every month brings news of an Internet company being swallowed. Acquisitions are financed by modest loans and especially by floating off peripheral subsidiaries, because Bertelsmann shares are not traded. They are locked in the safes of the Bertelsmann Foundation, and of those of another foundation in charge of the German weekly Die Zeit , but ultimately they are controlled by the Mohn family. Reinhardt Mohn, aged 78, still cycles to work but prefers to stay in the background.

Inability to raise large amounts of capital on the markets puts a limit on future expansion, but guarantees long-term survival. Unlike Rupert Murdoch or the German media tycoon Leo Kirch, Bertelsmann will not be embarrassed by cash-flow problems and does not have to fear takeover bids. Gütersloh's place on the corporate map of the world seems assured for a while yet.