Bertelsmann Reports First Half Profits, Sets Sights and Pins Hopes on Chinese Entrance

Thomas Rabe

Bertelsmann chairman and CEO Thomas Rabe

The German media group Bertelsmann has high hopes for investments in the Chinese music market, and optimism fueled by the successes of its music publishing division the Bertelsmann Music Group (BMG). At the presentation of Bertelsmann's half-year financial results in Berlin, chairman and CEO Thomas Rabe spoke to Billboard about its plans for the potentially enormous Chinese market.

When asked about the prospect of entering Asia's biggest music market, Rabe said that, while China has a piracy problem, the government as well as local companies such as China Mobile were increasingly committed to fostering the legal consumption of music and media. "In China, we are exploiting our international BMG catalog, which also includes Chinese rights," he said. "However, we are also acquiring rights of our own in China and Taiwan. These are still only small-scale activities but they do show that we now see greater potential in the Chinese market and have therefore established a local presence of our own."

Does Rabe expect any further global acquisitions by BMG? "In the first half of 2014, we pursued a very active acquisition agenda, obtaining a whole series of catalogs and signing artists in the three major categories: copyright, master rights and audio visual rights," said Rabe. "Today, BMG sees itself as a music rights company covering all categories of music rights. The music rights market is still fragmented. Alongside the large players, there are still many small catalogs, some of which are available. However, I am reluctant to speculate on what the future holds."

Like Rabe, BMG CEO Hartwig Masuch is also pinning great hopes to the Chinese music market. He explained that the Chinese market apps were a key tool for giving artists greater independence and thus establishing permanent ties with the fans. In music business, he added, there were some markets like China that basically only worked via apps. Looking ahead, a large volume of music would be consumed via such apps.

"Fans will no longer need to cumbersomely switch to other media, but will instead search for music on an artist-oriented basis," Masuch said. He estimates that the Chinese spend six billion dollars a year on music-focused digital media. Under the American definition, the global music market is valued at $16 billion. However, the Chinese only contribute $200 million to this figure as the traditional industry mainly only comprises downloads and CDs according to Masuch. Looking ahead over the next few years, he expects high music sales in China.

BMG has been wholly owned by Bertelsmann since March 30, 2013 -- had a positive effect, reported Rabe. "BMG continued its growth course during the reporting period, acquiring the music rights companies or catalogs of Talpa Music, Montana and Hal David, with numerous classics in their portfolios." At the same time, BMG signed new contracts with several well-known artists, including the Smashing Pumpkins, The Strokes, George Ezra and the Beatsteaks. "The company was Germany's most successful music publisher in the first half of 2014 -- almost 21 percent of all singles in the German charts were from BMG", said Rabe.

Bertelsmann reported for the first half of 2014 that consolidated revenues from continuing operations increased by almost seven percent to €7.8 billion euros (USD $10.3B) , the highest level in seven years (€7.4 billion, or $9.7 billion, in the first half of 2013). This revenue growth was driven, in particular, by the strategic transactions of the past 18 months. They include the combination of Penguin and Random House, Arvato's acquisition of the financial services company Gothia and the e-commerce service provider Netrada.

The RTL Group, the European entertainment network generated revenues of €2.7 billion (USD $3.5B) in the first half of 2014 (H1 2013: €2.8 billion, or USD $3.7B). The decline in revenues is primarily due to difficult market conditions in France and the decline in revenues at Fremantle Media. As of June 30, 2014, Bertelsmann had 111,761 employees worldwide.

In the past few months, Bertelsmann has systematically invested in strengthening its core businesses, said Rabe. RTL Group expanded its family of channels in Germany, Croatia and South-East Asia; Penguin Random House acquired the Spanish- and Portuguese-language trade publisher Santillana Ediciones Generales. Meanwhile, structurally declining businesses were further downscaled or sold, as was the case with Brown Printing in the U.S.; Bertelsmann announced its plans to withdraw from the club business both in Germany and in Spain.

Judith Hartmann, CFO of Bertelsmann, added: "Our net income will remain slightly below the previous year's strong level, reflecting the impairment of our Hungarian TV activities. We will continue to invest significantly in implementing our strategy, always bearing in mind our clear investment criteria."