Bertelsmann bolsters portfolio

In an effort to strengthen its position in this new era of digital communication and distribution networks, in February 2001, Bertelsmann announced that it was acquiring an additional 30% of the German TV, radio and film production company, RTL Group, from Groupe Bruxelles Lambert (GBL).

This will give Bertelsmann 67% of the company and allow it exploit the Group's rich online assets - something that could prove increasingly valuable if its embryonic relationship with Napster can weather the legal storm it has precipitated.

The agreement between Bertelsmann and GBL - whose stock is majority-owned by private entrepreneurs Albert Frère and Paul Desmarais - involves a share swap in which GBL's shares in the RTL Group are to be exchanged for 25.1% shares in Bertelsmann. While the deal leaves Bertelsmann the effective owner of RTL Group, 22% of the Group is still owned by Pearson and the remaining 11% is in free-float. Additionally, GBL has the option of floating - in whole or in part - its newly acquired stake in Bertelsmann within four years.

Bertelsmann's executive board - along with its founder and majority shareholder Reinhard Mohn - had been planning the acquisition for a number of months after a supervisory board had concluded that the development would be a positive step for the company. In an official announcement by the company it said: 'All parties involved agree that Bertelsmann has found a ground-breaking new way to adjust to changing conditions and to use its own shares as acquisition currency, while still retaining its entrepreneurial independence'.

Bertelsmann Chairman and CEO Thomas Middelhoff declared: "From both a strategic and a historic point of view, this is a significant step that will lastingly shape the company's future. It will strengthen Bertelsmann's position as the driving force in television, a future growth market. The RTL Group has a central meaning in Bertelsmann's corporate strategy.

He continued: "The brand's magnetism can be leveraged and developed for many media consumer communities throughout the various sectors and product lines. We have longstanding friendly ties with GBL and welcome them as a new shareholder. Bertelsmann's unique corporate culture will remain intact even in the event of a possible IPO in about three years from now," he said.

Assets
The RTL Group was created in April 2000 through the merger of CLT-UFA and Pearson TV. It comprises 22 television stations and 18 radio stations in 11 countries, and is the world's second largest producer of television movies - second only to Hollywood.

It is also Europe's leading sports rights marketer. The Group occupies leading positions in three of Europe's six largest media markets - Germany, France and the Netherlands and reaches 120 million television viewers and radio listeners a day.

What makes the RTL Group particularly attractive to Bertelsmann which, among other media companies stands out as having an entirely progressive attitude to new media and technology, is the fact that the Group has become the Internet market leader with 'RTL World' in Germany within just two years - a position that Bertelsmann is keen to exploit. Among the sites that comprise RTL World are: RTL.de, RTL.Dating.de, Formel-1.de, GZSZ.de and RTL-mail.de.

In recent months, RTL's websites have come to play an increasingly important role within the wider Group. Management have begun to see that RTL's online activities offer good opportunities for the cross promotion of content generated in different parts of the Group.

Didier Bellens, Chief Executive Officer of the RTL Group said: "Bertelsmann is one of the driving forces behind the RTL Group's growth. It has provided support at every stage of our development, with unerring vision and a distinct strategic interest in our business. Our joint aims are based on the same principles, our strategies are based on the same convictions, and our goals, as we shape the media of the future for our audiences throughout many countries, match perfectly."

Problems brewing
While the acquisition of the RTL Group is certainly a positive step for Bertelsmann, providing a rich seam of additional content and multiple new routes to market, its recent agreement with the now infamous Napster is under threat after judiciaries in the US and Europe effectively ruled the company's service illegal. If the deal is to make anything other than headlines, Bertelsmann and Napster have to persuade a highly sceptical media industry that the controversial service can work in all of their interests.

In early February, a US appeal court ruled that the Napster service knowingly helped its users - approximately 50m worldwide - to infringe the copyright of music owners. The ruling stopped short of shutting the service down at the time, but Napster admitted that the ruling could effectively force the company to close - particularly it was forced to pay damages.

Similarly, only days after the US ruling, the European Parliament also approved new rules that would make the sharing of copyrighted material via the Internet illegal without the permission of the owner within the European Union. The rulings - which take no account of the respective legal environments within the member states - are scheduled to become law within 18 months. However, this timetable seems optimistic given the complexity of the subject and the many appeals and counter appeals that are sure to follow in its wake.

Even if the service is forced to close, Bertelsmann and Napster are proceeding on the basis that they will be able to develop a secure subscription-based service, which they plan to launch in autumn 2001. However, of some concern to them must be whether their user-base will be prepared to pay to use the service and, if they are forced to close in the meantime, how many of their users will ultimately return?

Full steam ahead
Despite these rulings - and their possible consequences - the campaign to win the hearts and minds of a cynical media industry has begun in earnest. No sooner had the US ruling been passed down, Napster and Bertelsmann announced that they had developed a technology which would preserve the copyright's of content owners while, at the same time, preserve the file sharing nature of the Napster service. This, they stated, would provide the basis for the commercial service the companies are developing.

A week later, in an effort to assuage the anger of other media companies, Napster unveiled the business plan of the putative new service. The plan proposes to 'provide Euros 1bn to the major record labels, songwriters and independent labels over five years. Major labels will receive Euros 150m per year for a non-exclusive licence, divided according to files transferred. Euros 50m per year will be set aside for independent labels and artists, to be paid out based on the volume of transfers'.

The money for these payments will come from subscriptions: 'Napster is planning a tiered membership model that includes a basic membership plan and premium membership plan. Definitive pricing has not been set yet. However, Napster is looking at a price range of Euros 2.95 to Euros 4.95 per month for the basic membership that would have a monthly file transfer limit built in. The premium membership, which would cost between Euros 5.95 and Euros 9.95 per month would offer unlimited file transfers', says the statement.

In the meantime, both companies face the up hill struggle of attempting to persuade other media companies to make their music libraries available to the new service when it is developed. Yet, even if this proves impossible, BMG (Bertelsmann Music Group) plans to make its music catalogue available to the new service, as soon as it becomes a subscription service and can prove its security. If, and when, this happens, there is a chance that other media companies may follow suit.

However, the more likely scenario is that while Napster and Bertelsmann are distracted by their legal disputes, other media companies will attempt to move in and establish rival subscription services. Among those already planning such services are giants AOL Time Warner and Vivendi Universal together with a number of start-up companies including FullAudio and Streamwaves.

An academic point?
While the recent rulings in the US and Europe may represent a victory over Napster, they fall well short of providing of the music industry - and other companies whose products can be digitised - with the definitive answer to the problem of file sharing. There are a multitude of other file sharing services, like Gnutella, SpinFrenzy and CuteMX, that offer similar services to Napster. And, significantly for the media industry, their structures have been designed to make a prosecution virtually impossible. There is no one index controlled by an entity that could provide the focal point of an investigation.

Furthermore, if it were not for people like Napster's Shawn Fanning, Netscape's Marc Andreessen and other technical 'whizzkids' of their generation, then the Internet, as we know it today, would probably not exist at all. Therefore, it is slightly ironic that a pioneer like Napster, which is arguably raising the profits of the music industry by giving recording artists a higher profile, should find itself dragged before the courts by the big music corporations while they simultaneously develop their own Napster-like services.

The battle between Napster and the music companies represents more than a dispute about copyright infringement. It represents a battle between those who are responsible for making the Internet what it is, and those who want to control and commercialise it. It is for this reason alone that the music industry should drop their law suits against Napster and its ilk and thank them for introducing new acts to millions of potential new customers.