Bertelsmann Wants It All. They May Already Have It.

The announcement of a deal between Terra Networks, Lycos and Bertelsmann to create effectively the world’s broadest-based Internet portal is the latest in a series of Bertelsmann plays to aggressively expand their Internet activities. This fits nicely into Bertelsmann’s core strategy to leverage their enormous content pool into the one of the world’s largest offering of digital products.

“Kudos on their aggressiveness and their long-term vision,” said Michael Blok, senior analyst with Rabo Securities, “They enjoy a nice natural ‘hedge’, whereby if things on the web move as fast as the company expects, it will be in a good position to deliver through its Internet plays. And if things move slower, then their old core businesses will make more money for a longer time.””

Bertelsmann is not a publicly-traded company, but does allow individual investors to participate in profit sharing, through the use of profit participation certificates, sold on the Frankfurt Exchange and called Genussschein; about 30% of BertelsmannE’s equity capital is derived through these certificates (trading currently at Euro97.4).

Less splashy in the press than the Terra/Lycos/Bertelsmann deal but crucial to Bertelsmann’s overall internet strategy was a decision yesterday by the European Commission that cleared the way for a Bertelsmann purchase of 50% of Sweden’s Bokus.

Bokus, which successfully established itself as an online media and entertainment shop in Sweden, Norway, Denmark and Finland, in all local languages, is not surprisingly the market leader in all those countries – countries which, by the way, have the highest percentage of internet users by population in Europe. The joint venture acts as a major strategic foothold for BOL in Scandinavia, and dovetails nicely into Bertelsmann’s overall goals.

To get an idea of the strength of Bertelsmann’s holdings, consider that the privately-held German company is the world’s largest publisher of English-language books, through its acquisition of Random House; it is Europe’s largest broadcaster, with a 50% stake in Luxembourg based CLT-UFA, offering 40 TV and radio stations, and with their merger with Pearson TV, part of Pearson PLC, they will also be Europe’s largest production company. Bertelsmann owns BMG, the world’s fourth largest music label; magazine publishing giant Grüner and Jahr, and scientific publisher Springer.

And in order to sell all that content digitally, Bertelsmann has built, through development and acquisitions, a multimedia empire that includes BOL, a stake in US-bookseller, a 50% stake in Lycos Europe, and created the Bertelsmann Broadband Group, which develops interactive services such as television and film for cable networks utilizing broadband technology.

“Our core strategic focus is on further development of our positions in our different content markets,” said Bertelsmann spokesman Markus Payer, “so on the technological side, we’re working to digitize all our content.”

“That may be their long term goal, but that’s not the whole story,” said Blok, “It’s also based on organic growth and new initiatives, and perhaps cause they’re privately owned, they’ve been reasonably willing to suffer losses whereas publicly quoted publishers are less willing to lest their stock nosedive. “

But Blok points to rapidly changing factors in Bertelsmann’s core businesses, such as music publishing, which will find it increasingly difficult to make the level of profits to which they’ve become accustomed as the Internet changes the music publishing business model completely.

One of Bertelsmann’s most valuable sales assets are their book clubs, with 25 million subscribers throughout the world. The clubs are already fully operational on the internet, giving Bertelsmann a wet-dream of a mailing list. But Blok warns that this too can change, as the internet would tend to make less attractive the kind of monopolistic or duopolistic models Bertelsmann enjoyed with its clubs to date.

Bertelsmann, meanwhile, is aggressively pressing to further their goals; to that end, Random House is working to digitize its entire backlist of books, and BMG is digitizing all its music offerings. Bertelsmann also has a 60% stake in Pixel Park (Neuer Markt: PXL.NME), one of Europe’s leading internet services companies, providing services to establish and maintain online presence, Internet and intranet solutions, e-commerce platforms and a consultancy business.

“As an analyst I’m looking for true leaders, with high barriers to entry,” says Blok, “Now, Bertelsmann currently don’t have a stake in something extremely huge that is certain to dominate a submarket – an or even, anymore, an AOL. If they had something like that, then whatever happens in the next five years they would come out ahead.”

But, Blok noted, Bertelsmann’s BOL is well on its way, and should provide for a nice battle when Amazon really enters the European market.