The January 11th issue of the Wall Street Journal included an interesting article entitled, “Bertelsmann AG Repairs Phones? Yes to Diversify.” The article described how the world’s fourth largest media company is building one of the fastest growing services organizations that is providing call-center services, repairing mobile phones, running printing presses and even storing medical supplies for companies such as Nokia, Microsoft, MacDonald’s and BG Group Healthcare SAS.

The service division, called Arvato, isn’t a new venture but a longstanding and major component of Bertelsmann’s business, generating an estimated $5 billion in revenue in 2005 via 250 operating units in over 30 countries. Arvato’s origins stem from Bertelsmann’s success outsourcing printing services as an extension of its core publishing business. It has leveraged its technical skills to generate over $500 million repairing mobile phones, and is now reselling its warehouse facilities to pharmaceutical companies to store their products.

Another company that is finding fertile ground in the services business is the heavy equipment manufacturer, Caterpillar. The company is refurbishing and reselling old equipment to offset cyclical new product sales. The company’s remanufacturing business was worth over $1 billion in 2005 and is growing at 20% a year. IT is part of a larger services business that includes Logistics and Financial Services, representing 15% of Caterpillar’s total revenues and approximately 20% of its total income. The company predicts that its services business will represent 20% of the Caterpillar’s total revenue by 2010 and could contribute 30% of its net income at that point.

While these bold service strategies may seem like a new phenomena, they actually follow a model that many attribute to GE which has built a very successful service business in the airline and technology industries. When demand for jet engines began to wane in the 1980s and ’90s, GE transitioned its focus from manufacturing engines to servicing airplanes, and is now one of the leading outsourcers of airline maintenance services in the industry. The company has also been a quiet, but significant player in the computer services market for many years.

IBM and Hewlett-Packard recognized the value of a strong services business many years ago. Dell is one of the more recent converts to the strategic value and attractive margins associated with services.

The growing success of these corporate titans in various service businesses is a major driver of the escalating interest among private equity and hedge fund firms in the investment opportunities in the outsourcing market. These savvy investors have already acquired Affiliated Computer Services (ACS) and Sungard’s hosting business, and are rumored to be considering CSC.