Disney Still Behind Hollywood Records : Music: Leadership change, losses will not deter company from building the start-up.

Walt Disney Co. Chairman Michael D. Eisner said Monday that the company remains “totally and completely” committed to building a “mainstream” record company, despite the departure of the division president and continued losses in Hollywood Records’ fourth year of operation.

The looming exit of Peter T. Paterno--which was announced over the weekend--called fresh attention to Disney’s cautious approach to the business now dominated by Time Warner Inc. and Sony Corp.

“They’re neither fish nor fowl now; they’re not a real record company; they’re not a real . . . source” of fresh talent, said one industry lawyer. “You’ve got to be able to break new acts. No one wants to send their artists there.”

“We have been cautious,” Eisner said in a brief interview. But he added, “It’s too good a business for a creative company of Disney’s size not to be involved with.”

Hollywood Records was launched with fanfare in November, 1989, when Eisner declared that the cost of acquiring a record company had risen “beyond feasibility,” and he vowed to enter the business with a “carefully engineered start-up.”

In retrospect, several industry executives said Disney made several mistakes under Paterno, including trying to build too big of an organization at the outset. Disney also erred in the distribution deal it struck with Time Warner’s Elektra unit, because Elektra put no money into the venture and has been uncomfortable distributing acts that it played no role in developing, sources said.

In contrast, another start-up, Interscope Records, has built a successful operation with the leadership of producer Jimmy Iovine. Unlike Disney, Interscope formed a joint venture with Time Warner’s Atlantic Records for distribution. Interscope is now “the first or second choice of every artist,” said one industry lawyer.

Some critics also say Disney goofed with its selection of Paterno. He had excelled as an industry lawyer, but had no experience producing records or running a large organization when he joined Disney. Nor could Paterno immediately bring aboard his biggest former clients due to long-term recording contracts.

For whatever reason, Paterno did not fit readily into the Disney corporate culture. Paterno--who earned both an undergraduate and master’s degree in mathematics--didn’t communicate well with Wall Street or large groups, according to three industry executives who observed him in different settings. “He’s very emotional and didn’t really know the economics of the business,” one executive said.

In late 1991, someone leaked an internal memo in which Paterno pleaded with Disney’s top management not to dismiss him or abandon the business. The story generated headlines from coast to coast.

Paterno, who leaves in November, did not return calls, but the company said no successor has been named.

Eisner praised Paterno’s work in acquiring two catalogues, “Queen” and “Dave Clark Five,” and his recent recruitment of two promising creative executives, Bob Pfeifer and Nick Terzo. Eisner described Disney’s losses at Hollywood Records as small, and noted that the company still operates the industry’s most successful children’s label, managed separately.

Eisner would not rule out making a bid for a major record company, but conceded that with the industry’s consolidation, “nothing’s been offered lately.”

And he refuted speculation that Disney has foundered in the record business because of his own unfamiliarity with it.

“I resent that,” Eisner said. “Those persons did not hear me when I played the glockenspiel.”