Foro de la Nueva Comunicación con Thomas Rabe

Very well. José Manuel, many, many thanks for your kind words of introduction. I would have loved to respond in Spanish — José Manuel knows that my Spanish was much more fluid when I was part of the board of Antena 3. One of the things I feel is that now I spend less time in Spain since I changed positions in 2006, so I have fewer opportunities to practice my Spanish. So I'm sorry, I'll have to speak in English today.

First I'd like to talk a little about my relationship with Spain, which is not a recent relationship. It's a relationship that started when I was quite young — 16 years old, I think. This country fascinated me then, and I discovered it doing a hitchhiking trip from south to north, west to east. We're talking more than 25 years ago, as you can imagine. Later, when I had my first car, I returned to Spain, traveled to Cádiz, and saw this wonderful country once more. It was then that I realized how the infrastructure was developing, how they were preparing for the Expo, for the Barcelona Olympics, and I was truly impressed by what I saw.

And I was very lucky because professionally I've had the opportunity to return to Spain many times. I started coming from 2003, as José Manuel explained, when I began working on the board of Antena 3. As José Manuel said, well, we were in negotiations, and it's true it took some time to reach agreements. But once we signed, we never had to go back and read the contracts we had signed, which is a good proof that our cooperation and our friendship of so many years has been a success. You call them 'competidores' — collaborators and competitors. Yes, it's a new term I've learned today, but the truth is I like it very much.

So I was on the board of Antena 3 until 2005, when I was appointed Chief Financial Officer of Bertelsmann. And now I have the pleasure of coordinating Bertelsmann's activities in Spain, which as you can imagine are quite significant. Bertelsmann entered the Spanish market in 1962 when Círculo de Lectores was created here in Spain. Reinhard Mohn, the founder of Bertelsmann, who converted Bertelsmann into what it became, was the one who created Círculo de Lectores in Spain. It was Bertelsmann's first foreign investment, which demonstrates the close relationship we have with Spain. You only need to look back at the history and you see it's a very rich history. Today we have more than 8,000 employees in Spain, where we have significant revenue. The business is now a bit less profitable than we'd like, but that's due to circumstances that everyone knows about — the economic situation Spain is going through.

I want to make very clear from the beginning that Bertelsmann has been in Spain since 1962. We have a commitment to Spain. We will continue being in Spain and we will continue investing in Spain. We believe in the long-term prospects of this country. We believe the reforms being carried out by the current government are necessary, and I can tell you, based on the German experience — if our example serves you — many of these reforms take time to take effect. So the only thing I ask is that you be patient. I know it's hard in the current economic situation with such high unemployment, but unfortunately these structural reforms are necessary for this country, even though these reforms won't take effect overnight. We need to be realistic.

What I'll try to do today is share with you my views on Bertelsmann, but not only from Bertelsmann's perspective but from my personal perspective — our strategic agenda, the challenges facing the media industry, and how we propose to address these challenges in the years ahead. Bertelsmann, as José Manuel was saying, is the most important media company in Europe. We have a very broad portfolio ranging from television, television production, business-to-business services, book publishing, magazines, music, and more recently also education. Bertelsmann is a private company owned by the Bertelsmann Foundation.

The Bertelsmann Foundation — 177 years of history, which I think is quite a lot. And when we look at our competitors — Facebook, etc. — we realize that our competitors are quite young, even though they've had a lot of success. That's true, despite what happened with Facebook's IPO last week. When I was appointed Chairman and CEO of Bertelsmann, it was very important for me. At that moment I had two options. One option would have been to say: 'Well, I've been working at this company for 10 or 11 years, I know it well, I know what needs to be done, my strategy is such and such, I'm going to communicate it, and that's that.' But I decided to do something very different.

What I decided to do at that moment was to establish a dialogue at the group level, involving more than 400 executives at all levels, starting a conversation about Bertelsmann's situation — where we were at that moment, where we wanted to get to — to talk about Bertelsmann's culture, how to utilize it and improve it. And I can tell you it was one of my best decisions since becoming CEO, because it gave me access not only to the enormous knowledge we have in our company — every organization has knowledge, you just need to tap into it. And for that, you can't sit in your ivory tower waiting for information to come to your office. You have to go out to people and talk with them. So I had a whole series of dialogues and conversations.

And the important thing was not just talking or establishing dialogue, but above all understanding the state of the company, defining what would be the problems and opportunities, and taking a series of measures or decisions. Strategy is one thing, financing is another, but I believe that for a company to succeed in the long term, you need to take into account other factors like culture, the way people work, how people collaborate, and above all a sense of purpose — what is the objective of our company and what contribution can our company make to society and to our clients, because that is extremely important.

So we identified a series of things from that dialogue and decided to take measures to improve Bertelsmann's situation, which I believe is an absolute necessity for successfully launching any strategy. There are two other important things I did from the beginning. As I've said many times, both internally and externally, I firmly believe in creating teams. And I always say it very directly, and I'll repeat it: I don't believe an international media company should be run by six German gentlemen. I don't think that can work because we are an international company. We have employees in many countries around the world, our clients are men and women of different nationalities, and therefore I believe the structure of the board of directors — the decision-makers in the company — should reflect that diversity.

Not just because diversity is fashionable now, but because it's important. What we did was create a management committee composed of 13 members from six nationalities, four women, aged between 32 and 65. It is the most diverse management team you'll find in media anywhere in the world. And I can tell you it works very well. The first meetings we've had have been fantastic because you have access to very different perspectives, people with very different backgrounds and cultures. I really recommend it to anyone who can do something similar with their boards of directors.

Speaking now about Bertelsmann and what I would describe as our position — our company is in very good financial shape. Our profitability is high, last year's margins approached record levels, our cash flow is very solid, we have little debt. The rating agencies have increased our ratings in recent years, so that can happen — although you get the impression when reading the financial press that rating agencies only downgrade companies. We managed to get a very good rating. Our position in the markets is very good, thanks to the success of our businesses and of our creative people all over the world.

But fortunately — taking into account this very diversified portfolio and the various businesses we've invested in — despite the negative macroeconomic environment, we continue to have very good results, even this first quarter of the current year. And the question one might ask is: if everything seems to be going so well, why change anything? Well, I believe when things are going well is precisely when you should think about change, when you should think about what to do next, who the company should be, and envision the situation several years ahead.

Now let's talk about our results. Last year's growth was 1.5%, which is not enough. And we're not just talking about 2011 — this has been the average situation over the last five years. So we have a growth problem. In terms of earnings, I usually don't climb up on these stages — forgive me, I'm very tall so I don't need to. The reasons are evident. Although people don't usually take it into account, and generally try to ignore it, the fact is that Bertelsmann, as an international company, is mainly European — 80% of our revenue comes from Europe.

There's nothing wrong with that because I love Europe, I love living in Europe. But unfortunately, Europe — for many reasons including demographic factors, but also sovereign debt, pressure on welfare systems, etc. — Europe is not going to be the region of the world that grows the most in the coming years and decades. That's a fact. We need to accept it. The first reason we've had low earnings growth is that 80% of our revenue comes from Europe. Another reason is that we have traditional media, which is fine, but traditional media don't grow as much as new media. And another explanation for this relatively low organic growth is that despite having generated €5 billion in revenue over recent years, and despite making portfolio cuts in the last year to strengthen it, some of our businesses continue to suffer a structural decline.

Our debt is well controlled, as I've said, but our investment capacity is not as good as we'd like, and not as necessary for implementing Bertelsmann's strategy. If we add all this up, we see that all media companies, all groups of this type, are now going through a transformation — we can call it a revolution or whatever we want — but all our business models are going through enormous change, and we don't know what future business models will be. We have some ideas and I believe we're in a good position to shape them, but it's clear the competitive environment is changing. The new competitors entering the market — Amazon and others — affect us, and this is something we have to keep in mind.

This is our starting position, and on this basis I've defined four priorities for Bertelsmann looking ahead, which form part of our strategic process. First, we want to reinforce our core — our business. We need to invest in creativity and maintain the creative substance of our businesses, because that is the foundation of everything we do. This is very important because it's very easy to optimize short-term profits by cutting investment in creativity, but that won't produce long-term results. In the end it will negatively affect us and hurt us long-term. So Bertelsmann has clearly stated that we want to invest in creativity, that we're not thinking about optimizing quarterly profits — we want to create long-term value.

A very important thing in this context — and it's a topic discussed a lot in Germany and the rest of Europe — is how, in this fragile new situation, we can protect our intellectual property, our IP rights. How can we protect our creative production? One thing that is absolutely necessary for that is to educate everyone, including young people, about the value of creativity, the need to protect creativity, and to compensate and remunerate creativity. Because if we don't, creativity will eventually decline and we'll all suffer.

Furthermore, we've made it very clear that the media sector, the creative sector in general, plays a very important role at the macroeconomic level — practically in all economies, from the employment perspective but also from the value creation perspective. What Bertelsmann will certainly do, and I'm sure many will agree with us, is strengthen our media policy. We need to make it clear for the future, increase our share of voice, and ensure that the new rules being created by regulators are compatible with the businesses and new business models we are developing. The amounts of money Facebook and Google spend on lobbying far exceed what companies like Bertelsmann spend. In this sense, we need to make our voices heard.

The second strategic priority is the digital transformation of our businesses. It's a reality — it's happening. So we have two options: one is to adapt to this digital transformation, and another is to try to ignore it. But if we ignore it, it will cost us dearly. We believe it's important to have a positive vision of what this digital transformation can bring, transforming our businesses, investing in new business models. To be honest, we're making a lot of progress. If we think about television, for example, the amount of work done in the television world — creating channel families, benefiting from opportunities to enter other countries where we weren't before and that were previously closed to Bertelsmann.

And regarding book publishing in particular, when we look at the situation in the United States, we see that digital transformation is already a reality, and not a small one — a very large one. More than 20% of books sold in the United States are electronic, and this number is growing rapidly. In the case of some books, the percentage is even 50% or more. Once again, is this positive or negative? It's too soon to say, even in the United States, because we don't know how all this will affect e-book prices, what the environment will look like shortly, what will happen with competition with Amazon, whether something positive will happen like with iTunes and Apple in music. But for now, we're benefiting from the digital transformation. There are so-called digital dividends because distribution, production, and handling costs are lower.

And in our magazine business, to be honest, this digital transformation is clearly a phenomenon not just European but global. We've made considerable progress with applications for electronic magazines, etc., and we're trying to identify opportunities — for example, vertical opportunities. We're already starting to do something in some countries. We also have a B2B business that is becoming a digital services provider, especially for e-commerce and electronic software distribution. So there are really many opportunities in the digital field.

And one thing we need to address, like other traditional media companies, is improving our IT and technology skills. I'm 46 years old and the truth is I didn't grow up with the internet, and the same can be said of many people in this room. But we are the ones making decisions about the future of our businesses. And to make well-informed decisions and understand what our younger employees are telling us, we need to improve our technological qualifications. That's why we're creating what I describe as a summer camp for technology. All executives, including me, will attend this summer camp, and I'm sure it will be very useful and fun. We'll learn and gain more information and knowledge about technology and the opportunities it offers.

Everything I've said so far focuses on our existing businesses. But looking ahead, Bertelsmann is going to invest in other businesses of a slightly different nature, with other characteristics. We have very clear investment criteria for the future, and these criteria are necessary for Bertelsmann to become a more global and less European company, but also more digital and with faster growth over a period of 5 to 10 years.

The investment criteria are relatively simple, although I can tell you it's quite difficult to apply them in practice. The criteria are: first, businesses that have a high degree of stability — less cyclical than advertising-based businesses, with an emerging markets component, with an established digital model that allows us to buy and create our own opportunities. The majority of our investment funds will be allocated to this type of business. In fact, we've already started — three years ago, after divesting from our traditional music business model, we invested in BMG Rights Management, which has become the fourth company of its type in the world with a million music rights. This is very important because these music copyrights are global — we can exploit them worldwide. And this business, by the way, is stable, less dependent on advertising, has opportunities in emerging markets where music consumption is very high but monetization is quite low — but that will change over time. And it's a business that can also grow organically through acquisitions.

The second sector we like and in which we've started to invest is education. Education is an enormous market. Currently we're focusing on online education services. We didn't do this by investing a lot of money upfront, because honestly we didn't have the competencies or qualifications in this business. I tried to find the right management team to work at Bertelsmann and build an education business. Last year, fortunately, we found the right team. These people said: 'We like Bertelsmann, but we don't want Bertelsmann to hire us. We want to remain free entrepreneurs and run our own businesses. Now, if you want to invest in us, become shareholders, go ahead.' And that's what we did. We have a 50% stake in Alliant University Adventures in the United States, and we've invested in online higher education services, etc.

And the third sector we really like is information services — providing analytical information for various business users across many segments and sectors. It's a global business, a growing business, an established business model, and it will be the focus of Bertelsmann's attention in the future. The second element of growth will be increasing our presence in markets outside Europe. I mentioned that 80% of our revenue comes from Europe, and we want that to decrease — not by shrinking our European businesses, but by investing more in global businesses outside Europe.

I'm not naive. I know it's difficult to invest in China and Brazil. I've spent a lot of time in those regions, especially in China. I've traveled to China many times. These are complex, heavily regulated markets. India is a very populated market, etc. But there are reasons to try. What we've done is establish corporate development centers in all those regions, investment funds focused on digital investments, and the majority of our businesses are already present in these regions. And we've managed to do so profitably from the first day, all managed by local executives, which we think is a necessary condition for success. Trying to run a business in China with a German executive would be a failure. You need local people you can trust, and you need relationships of trust that can't be built overnight — they take time.

So we have global teams with a global vision, and we're going to invest much more in these regions over the next 5 to 10 years. It's clear that the big question — when I talk about transforming existing businesses, investing in new businesses through acquisitions, and increasing our international presence — is that this all needs to be financed. You'll wonder how you're going to finance it. Well, Bertelsmann is a private company with a lot of liquidity, but it takes a lot of money to invest in all this. We've announced at a press conference that we're going to change the legal structure of Bertelsmann. I won't go into detail because even for Germans it's difficult to understand this structure.

But this legal structure will allow us to combine two things that previously seemed to be in conflict: the interests of the Mohn family, who are the main shareholders of Bertelsmann, ensuring the business follows the guidelines established by the Mohn family, and at the same time opening up the capital to third parties — going public or in some other way. That hasn't been decided yet. But Bertelsmann has always been an innovative company when it comes to financing. Reinhard Mohn, when he created this company, was always short of capital, as happens with many private companies, but always found a way to identify where the money was — whether through private equity or other partners. I'm sure we will continue to be innovative in the future when it comes to financing.

What do I want to achieve? What do I want Bertelsmann to achieve? I want it to become the most entrepreneurial and most innovative media group. I want Bertelsmann to open up to new alliances — like the ones we have here in Spain with Grupo Planeta and with Mondadori — but also to entrepreneurs who approach Bertelsmann because they have business ideas they want to put into practice and need a partner, a partner with capital but who also has the capacity and resources to help these companies grow faster and expand internationally.

I believe this is interesting. It will be an interesting journey we're embarking on. The atmosphere is very positive. People in the company are eager for this change to happen, although it won't be an easy change, nor will it be achieved overnight — but over 5 to 10 years. It's clear my results will be measured in this way. I believe Bertelsmann should be not only a successful company but a great place where people want to work, a fun place to work. Thank you very much, and if you have questions, I'll be delighted to answer them.

I'd like to start with a general market view of Europe because I think that would be important...

In the past, when we talked about Bertelsmann and our businesses in Europe, we thought Europe had become a single-cycle economy. For a while it was, but no longer. Today, Europe is very diverse: Northern Europe, Eastern Europe, Southern Europe have different conditions and economic cycles. Looking at early 2012, in Germany, TV advertising dropped significantly, magazines also dropped. There's a shift from magazines to TV, and this trend is accelerating. Book publishing in Germany is stable and profitable. Magazine business dropped in Central and Eastern Europe due to difficult macroeconomics. In Southern Europe, especially Spain, some segments have dropped over 50%. Spain remains important for Bertelsmann's profits, though profits have fallen despite cost-cutting efforts. I believe expenses can be cut and processes optimized only to a point, as cutting too much hurts the creative business. In Spain, if we believe in recovery, we must accept lower profitability without excessive cuts. Bertelsmann's financial strength allows this. My message: make necessary cuts but don't overdo it, or we'll pay later. Business in Spain is still profitable, but not at past levels.

Yes, a very good question, and quite difficult to answer. The legal format change has been decided; we're registering the company with the new form. We announced it and have already done it. All formalities are complete. As I said before, it's a necessary but not sufficient condition for Bertelsmann to go public or raise third-party capital. To be honest, my first priority in this phase is to define Bertelsmann's strategy based on the strategic priorities I just mentioned. That's my main task, and the management team is working on it. You can call it strategy or whatever, but I want to ensure that before we launch it and think about financing, there's consensus across the company, among all shareholders and stakeholders. This is crucial in a diverse company like Bertelsmann with different opinions and businesses. Regarding raising capital, there are many ways: Bertelsmann has a high credit rating, can get debt, hybrid formats, fixed-income financing. We're not opposed to going public per se; in fact, we collaborate with public companies like Antena 3, one of our minority holdings. Bertelsmann is market-oriented and meets all requirements for reports, governance, etc. The only financing used so far is voting shares at the Bertelsmann level. In my preliminary opinion, it would be a mistake for Bertelsmann to go public in its current format. In the first phase, we'll likely raise private capital to execute the strategy, invest in new businesses. Once transformed, we'll have a solid base for an IPO, but we're talking 3 to 5 years, nothing imminent.

Regarding the second question, Bertelsmann is very active in many things, but not in developing laws, unfortunately. We can't approve the laws we'd like, nor would it be right. However, we've increased our voice; we want to express it more forcefully, not just for Bertelsmann but for any content group. In this sense, efforts are needed first to educate people, consumers and regulators, about the importance of creativity. There's no reason to protect creative formats less than the real estate sector, for example. It's a pity that piracy culture has established itself on the internet, and media groups have contributed by often offering free content. Piracy is a major issue; it's one reason the music industry lost over 50% of income in recent years. Piracy is somewhat better now due to regulations and greater consumer awareness that it's illegal, plus copyright protection for intangible assets. But the most important thing is to educate people. Piracy in book editing is less, but we're starting to see it with e-books. I've heard horrible stories of e-book piracy and difficulties in pirating copies. So we're better there, but ultimately, it's about awareness, a proper legal environment, and technological measures to protect our intangible assets and copyright.

Let's start with the last comment, which probably covers the other two questions. Newspapers have clearly suffered in recent years for various reasons, including free content on the internet. I don't think a paywall business model is fully developed yet. Some media have paywalls like the Financial Times, New York Times, Economist, but they're still in trial phases. We've seen some positive initial results, but it's unclear if these models will work or if the paywall will be hard, soft, or in between, and how to avoid them if people buy print in combination with electronic format. All these things are still in early stages, so I can't give a clear answer. What would be a mistake is replacing our current print revenue with little electronic revenue. Regarding the FT and NYT, their paywalls may not apply to other newspapers; it depends on editorial content quality and specialty. What you don't want is a paywall for content freely available on the internet, as that loses traffic and advertising. For example, Bild Online in Germany is very popular and profitable from advertising, but it's impacting Bild's print version. The question is whether now is the right time for paywalls and what kind. There's no clear answer. If we want newspapers and magazines to have a future, we must develop a payment model beyond advertising. I don't think newspapers will disappear, but circulation will keep declining as it has for years. The question is if the decline will accelerate; I don't think so based on data for Europe. The decline is slow, compensated by price increases, at least in Germany. There's no one-size-fits-all; each newspaper must find its own model.

No, we won't do that. As we explained and José Manuel explained, we're partners, collaborators, friends. The joint venture between Bertelsmann, Planeta, and Círculo de Lectores is working very well, even in a difficult economic environment. We have no plans to undo this alliance; our plan is to strengthen and reinforce it. As for Springer, which we sold in 2003, it's a potentially interesting business, as I've said publicly, because it meets our investment criteria: a global, digital business growing rapidly, relatively stable, with few cyclical elements, quality-based, long-term contracts. It has threats but overall we like it. We sold it when it was very different; the current owners have made it much more profitable.

As I said before, part of our strategy is to reduce dependence on Europe, not by divesting European businesses but by investing more outside Europe in coming years. The US is still the main media market globally. We have important things there: FremantleMedia, a major production company for entertainment formats like American Idol. We have other US businesses we'll relaunch, like music. Random House in the US is the leading book publisher, and education is a sector of great interest. The US is a very attractive market; it's a trillion-dollar business with 30% commercial, an important part of the global education market. Commercial education is based in the US, so we'll focus on it initially, then expand globally. All information businesses originate in the US. For other regions, it varies by country. For example, China is highly regulated for traditional media; you can't easily launch a TV channel. There are ways to enter TV production, but it's complicated. Investing in book publishing and magazines is difficult. But we've created an investment fund, Bertelsmann Asia Investments, investing in new media and services. We take minority stakes; three of these companies are already listed on the New York Stock Exchange, providing liquidity. Given China's regulatory environment and uncertainties, this is the best way to establish, create a solid network, and participate in value creation in Chinese media, growing at 15%. Our Asia investment companies had high profitability, but since investments are minor, we're analyzing these markets, their potential, regulatory environment, and choosing which battles to join. We'll make larger investments in China, India, and Brazil, but only when we have more confidence, established management teams, and a more open regulatory environment.

I wish it were defined, but that would be mere speculation. Regarding digital transformation, it depends on the business. For example, television: in a way, digital transformation has already occurred. With DTT in Spain, when I joined Antena 3's board, it had one channel; now it has a family of channels thanks to digital terrestrial TV. This digitalization and fragmentation happened much earlier in Germany due to digital and cable distribution. So for TV, we have much fragmentation thanks to digitalization. The next step will be time-shifted TV and video on demand, a great opportunity. Based on figures I've seen, video on demand and time-shifted TV will change content and make TV more relevant, though in a slightly different format. We must adapt our business, ensure we have VOD and time-shifted TV platforms, necessary rights, both ours and third-party. To give a figure, RTL Television in Germany alone had 123 million video downloads in March—123 million in one month, very relevant figures, huge reach. This reach will eventually convert to revenue via subscription, advertising, or both. For Random House, digital book growth last year: over 40 million e-books sold, very important. In e-commerce, we're benefiting from e-commerce platforms' explosion. We're already making this digital transformation, but the answer is complex for Bertelsmann because we've invested in so many businesses in so many countries. For example, in education, what we're doing wouldn't be possible without an online digital proposition, as we're talking about digital electronic education. New technology enables things that wouldn't be possible otherwise. So I believe these are many facets of the transformation.

Well, again, I can't answer this question. The electronic advertising inventory is increasing, and when inventory increases, supply rises, which usually means prices go down, not up. But the situation will vary depending on the proposition. I can imagine some digital propositions could charge high prices, especially if targeting specific audiences—what we call targeted advertising. I don't think there's a general answer, but in many ways, digital advertising prices will drop.

I'm not a politician, fortunately, but I'm affected by political decisions, so I'm interested in these topics. Let's start with the balance between austerity and growth, which is at the heart of conversations at the European Union level and beyond. If we look at the US, they've taken very different measures, increasing public spending. There's a general view that reducing the budget deficit by more than two points of GDP per year strangulates the economy, and I think this is accepted, as main economists like Paul Krugman say. This shows Europe must find a balance between austerity, structural reforms, and investments. I believe the current balance will adjust due to political and other pressures, as it's increasingly recognized that austerity alone won't work—looking at Greece and Spain to some extent. Beyond economics, I believe it's unacceptable that Europe, in general, has the unemployment we have; it's not socially acceptable. Something important must be done about unemployment; the state will have to play a major role. That balance between structural reforms, austerity, and growth investment will need readjustment, and I think it will happen. Germany will play a positive role here. Regarding economic outlook, it's hard to predict. I've discussed it with some of you and read the latest Economist report. We immediately see two problems: Greece's elections and their impact on the European financial system, and if they affect Europe and Spain and Portugal. Then there's the stability of the Spanish banking sector, strangling the economy, especially SMEs. These issues must be resolved quickly. From companies' perspective, we see the economic decline; we have 8,000 employees and revenue in Spain, so we're part of this economy and share the many concerns here present.

Well, I believe they're already having a significant impact. In education technology, we talk about online education; there are over 3 million online students in the US, many of whom are adults with jobs who couldn't study otherwise. Online education will help personalize education; it doesn't make sense to have 30 students in a classroom with different levels of talent and knowledge all taught the same way. New teaching methods being developed in online models are very interesting. So there are many things: on one hand, technology will improve education and results, necessary for a skills-based economy, and also reduce education cost, very important given public finances and states' difficulties offering quality education. Specifically in emerging markets, there's enormous demand for education far exceeding supply, for professions where online education, being more scalable, can help resolve these problems. So there are many reasons to believe online education and technology will become an important force, and it's already happening.