Bertelsmann Plays for Keeps

To some e-commerce watchers, Bertelsmann AG has not been maintaining an appropriate demeanor for the fourth largest media company in the world, of late. As it voraciously scoops up book and magazine publishers all over the world, the German media giant is looking more and more like a spoiled kid trying to blow his inheritance in a single weekend.

With its latest escapade — going to the rescue of CDNOW, Inc. — it appears that Bertelsmann may be taking a bloody nosedive into a bucket of money.

It cost Bertelsmann $141 million (US$) for CDNOW, a company that is deep in debt, and still losing wads of cash. The online music company has lost $212 million and counting since 1994, according to reports, and has made an appearance on every dot-com death watch list issued since the start of the year.

As if to underscore the absurdity of the deal, Bertelsmann not only paid more per share than CDNOW is currently getting on Wall Street, but also agreed to take on the failing dot-com’s considerable debts.

Bargain Basement

Crazy, right? Not so fast. Bertelsmann may be overeager in some respects, but the company obviously plans to shoot marbles with the big kids in the media playground. And that means being able to copy all their best moves.

Bertelsmann has been closely watching America Online (AOL) and Time Warner as the companies lay the groundwork for functioning as a single entity — assuming they get approval from the regulators. Should the AOL Time Warner merger succeed, Bertelsmann may be waiting in the wings — ready, willing and able to take its traditional media empire online in a big way.

Bertelsmann is already a partner with Lycos, but portals represent a roundabout pathway to large-scale e-commerce. There is a more direct route.

From Start to Finish

Bertelsmann was at first mainly a publishing company, so having acquired a 40 percent share in Barnes & Noble.com makes sense as a way of boosting its margins — the company can function as both producer and retailer. The acquisition of CDNOW will allow Bertelsmann to do the same with its record label, BMG Entertainment, the second-largest in the United States.

Bertelsmann recognized that the label needed a direct pipeline to the Internet. Yes, Bertelsmann has its own e-commerce unit — but it is not a well recognized brand name. Getmusic.com, which Bertelsmann partly owns, just isn’t very high on the food chain. Despite its financial woes, CDNOW is consistently ranked among the top five most frequently visited music sites on the Web.

But Music

Okay, so what about the cloudy long-term future of CD sales in general — online or in the real world? Isn’t downloadable music the real wave of the future? While that possibility may eventually become a reality, there is nothing to prevent CDNOW — under the right strategic management — from becoming a one-stop shop for music, whether sold as CDs, downloadable files, or in some other as yet undeveloped form.

CDNOW is clearly just a small outpost of the online empire that Bertelsmann is on its way to amassing. In fact, by being on the e-commerce side of the tracks, Bertelsmann may actually be well-positioned to beat AOL Time Warner at its own game.

Technically, CDNOW may be a victim of the dreaded dot-com shakeout. But it is important to remember that the analysts who first qualified and quantified the e-commerce storm predicted a healthy consolidation in its aftermath.

Walk This Way

Taking a long view of the big picture, Bertelsmann looks pretty savvy. In fact, the company is setting the bar rather high for dot-com survivors who want to be players in the game for the best marbles. The companies that are in a position to do so — thanks to profitable businesses in other domains — should take the German giant’s cue.

If CDNOW, long suffering under the weight of dot-com failure, can become a jewel in a growing online empire, other firms with market share, brand names and online experience will offer the same value proposition. And those offers may be too good to refuse. Is Bertelsmann crazy? Sure. Like a fox.