TIME EUROPE
November 13, 2000, Vol. 156 No. 20
Middelhoff's Vision
The Bertelsmann boss pulls off a shocking deal with renegade Napster. And he's just warming up
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Although Middelhoff is a global executive who considers it normal to have meetings in Paris and New York on the same day, he lives on a farm outside Gütersloh with his wife, five kids, 45 cows and sheep and a duck pond. "Thomas is one of those rare beings who can always see the world from 35,000 feet, yet be right there with you on the ground," says Aydin S. Caginalp, Bertelsmann's attorney in the U.S. for 18 years.
Maybe, as an investment banker who has sat on both sides of the table in several of his deals contends, Middelhoff is able somehow to suspend his cynicism for his faith, his trust. "You look him in the eye and he tells you something, you know it's true," says the banker. "He is very trusting, but he leaves you knowing that if you ever abuse that, it's the last time you will ever sit down with him."
Before taking office, Middelhoff spent a year in the U.S., improving his English and trying to get to know every media bigwig in the States. He and AOL chief executive Steve Case became good friends, and Case began to introduce Middelhoff around. Although he may have that steely look and the precision dress of a Frankfurt banker, his new media friends discovered Middelhoff to be a man of surprising charm and easy humor. Among Middelhoff's new acquaintances was Samuel ("Si") Newhouse, chairman of Advance Publications, which publishes, among other magazines, Vanity Fair and the New Yorker. A week after attending Si's birthday party, Middelhoff bought Advance's Random House book business for $1.4 billion.
But in January, the Bertelsmann train was sidetracked. Middelhoff's good friend Steve Case announced that AOL was buying Time Warner (Time's parent company), and other media megamergers left little room for the big deal that might seal a No. 1 content position for Bertelsmann. Middelhoff redoubled his efforts to reorganize the company around digital content, and in one stroke sold off the firm's stake in a string of companies before the spring dotcom meltdown. That netted an estimated $15 billion — $8 billion from the sale of AOL Europe alone — to shop with.
So off he went, in search of the building blocks for a grand castle of e-commerce and content. When the Concorde was flying, the Bertelsmann chief was known for communting from New York to Gütersloh each week, sometime twice, stopping in London or Paris for lunch or dinner along the way. He reogranized Bertelsmann's broacasting business, which led to the partnership with Britain's Pearson that makes the resulting RTL group the number one radio and televsion concern in Europe. Middelhoff also brokered the alliance between Terra Networks and Lycos. He has picked up stakes in companies like Rocketbook-maker Nuvomedia, bought CD Now and launched a $1 billion venture capital fund.
Which underscores another point about Middelhoff. "I've learned to be flexible and wait for the right opportunity," he says. "But I have also been very lucky." The first step in the Napster courtship was a Middelhoff masterstroke. Last July Universal chairman Edgar Bronfman, in an attempt to resolve the file-sharing threat to the music industry, called a meeting of top leaders — including Napster CEO Hank Barry and venture capitalist John Hummer — during financier Herbert Allen's Sun Valley retreat for media moguls. Instead of sitting with Bronfman and Sony chief Nobuyuki Idei, however, Middelhoff went to the other side of the table, next to Barry. The meeting was brief and inconsequential, but Barry certainly remembered Middelhoff's gesture, as if a seed had been planted.
For Middelhoff, Napster was a natural solution to his long-standing pledge to make Bertelsmann king of the music-content world. "I realized that we had to pursue music from two sides," he said last summer. "There is content, but there is also online file sharing. We could not get ahead without file sharing." Bertelsmann's technology arm had been working on its own file-sharing system for months. "But we realized that all the technology gave us was an illegal way to distribute files," says Middelhoff. "We had to make it legitimate, and Napster already had a base to work from."
So in late August, Middelhoff decided to go after Napster himself. Ironically, he came to that conclusion after a meeting with Seagram chairman Edgar Bronfman, a staunch Napster foe, in which they discussed ways to resolve the Napster question. "We walked out of Edgar's office, and Thomas and I looked at each other and it just clicked," says Andreas Schmidt, president of the Bertelsmann e Commerce Group, who orchestrated the partnership. That day, Schmidt got on the phone to Napster CEO Hank Barry and began eight weeks of intense intercontinental negotiations, from San Francisco to Miami, New York City to Gütersloh.
It is a long way from Napster's base to a real solution, however. Though other music companies last week voiced cautious approval of the Bertelsmann move, there is considerable resentment of the deal. Indeed, it took intense negotiations last month and, ultimately, management fiat for Middelhoff to win the support of top executive Strauss Zelnick at his own BMG. So far, nobody has indicated any willingness to drop the legal action against Napster. "We're still not on Napster's side," says Zelnick, laughing. "We're suing Napster. But we are also on the side of creating an array of legitimate distribution alternatives."
The sticking point now is the new business model, which nobody at either Napster or Bertelsmann is certain of. Although for months Barry has been quietly negotiating with just about everybody in the music industry to find conditions that would defuse the legal action, no company would touch a deal. The main reason is technology. "This is really difficult stuff," Barry concedes. So far, it just isn't clear how to track every digital file out there and put a user name and a price on it. Even if that is possible, there are huge questions about what a reasonable price would be. Barry has suggested a monthly fee of about $5. But websites all over cyberspace burned furiously last week as Napster fans threatened to ditch the service if it charged as much as a nickel for music-file access.
"We are convinced we can preserve the values of the community while having something that will be supported by the industry," says Barry, though he has no clue as to how Napster will be profitable. But that's what Bertelsmann's millions are all about — a vast new effort to overcome the technological and fiscal hurdles. Napster, which has been in a hiring freeze while it fought the court action, now is one of the few places in the Silicon Valley with a help wanted sign on its door. Fanning has big plans for a next-generation service with enhanced file sharing and instant-messaging capability.
That is a long way off, particularly if the courts rule against Napster in the next several weeks. No matter, says Middelhoff. "I am always an optimist," he insisted to Fanning last Tuesday, as they walked briskly along Manhattan's Central Park South to announce their new partnership. "It's a beautiful, clear day, I think really a good day for a new beginning."
This edition's table of contents
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November 13, 2000
COVER STORY
Stormy Weather
Are Europe's floods, gales and droughts here to stay? Yes, say the experts — and it could get worse
Any Better Ideas?
Possible solutions to global warming
EUROPE
For Whom the Bell Tolls
Lloyd's of London has won its landmark legal battle with investors. Now it must rebuild its fortunes
Interview: Max Taylor
The chairman of Lloyd's, on winning
Sitting Pretty
Once dismissed as a Barbie Doll, Socialist star Elisabeth Guigou is a premier contender
A Brief History of the Higgs Hunt
Fast Forward Europe: Scientists in Switzerland may have solved one of the great mysteries of particle physics. Why should we care?
Digital Democracy
A young German entrepreneur is campaigning to bring people all politics, all the time — online
AFRICA
Above the Waterline
New investment helps Mozambique recover from natural disaster and years of economic stagnation
BUSINESS
Middelhoff's Vision
The Bertelsmann boss pulls off a shocking deal with renegade Napster. And he's just warming up
The Bertelsmann Spirit
The Napster deal reflects the corporate culture and entrepreneurial spirit inculcated by Reinhard Mohn
New World, Old Faces
Established firms team up with online specialists to venture into the terra incognita of the Internet
SPORT
Football's Crewe Cut
Seeking an end to transfer fees, the European Commission tackles soccer's governing bodies
THE ARTS
The Best of Both Worlds
Is it possible to be upwardly mobile yet keep hold of your principles? The new élite thinks it is
DEPARTMENTS
On Your Own Time
Copenhagen
World Watch
WHAT DO YOU THINK?
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