Cash-Rich Media Giant BMG Waits in Wings, One Eye on Hollywood

In physics, every action has an equal and opposite reaction. But in Hollywood, inaction often gets a bigger rise--as Michael Dornemann has learned.

The Bertelsmann Music Group chairman has been criticized by some colleagues for repeatedly passing on opportunities to make a move on a film and TV company, at a time when much of the industry is consumed by acquisition fever.

The latest non-deal came late last year, when discussions with Castle Rock Entertainment collapsed. Before that, there were rumors of a partnership with Paramount Communications. In those cases and others, Dornemann hung onto his wallet.

“It’s not that I don’t like these deals, they’re just too expensive,” Dornemann said during a rare extended interview recently in Beverly Hills. “At some point we want to play in this area, but it’s not a priority to buy a studio now.”

Pressed to be more specific, Dornemann says it may be years before his company, a division of German-based media giant Bertelsmann, goes to the altar. People close to the executive say his stance reflects both his precise and deliberate style, and the private conviction that it’s better business to educate himself before striking a deal.

Dornemann also is working on the assumption that prices will fall when the technology hoopla fades. Some think he’ll eventually make an offer on MGM, while others see Dornemann starting with an independent production company. He has also discussed partnering with other entertainment companies in specific ventures.

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“You get the feeling that they are dying to get into this business and become a major player,” said one analyst. “But I’ve never gotten the sense that they are willing to commit capital to it. As long as they are so conservative, they will probably never get an asset, because there are buyers willing to pay higher prices.”

In some ways, Dornemann is a reflection of the closely held and conservative-minded Bertelsmann--the world’s second-biggest media company behind Time Warner, with net income of $332 million on revenue of $11 billion in the last fiscal year. Its assets include Bantam Doubleday Dell publishing company and a major record club, besides its music holdings.

Dornemann came aboard in 1982 as executive vice president for finance, printing and manufacturing at its headquarters in Gutersloh, Germany, two hours outside Frankfurt. Four years later, he engineered the purchases of Doubleday and RCA Records.

A scholarly executive with a doctorate in economics from Technical University in Berlin who prefers the old-world ambience of the Regent Beverly Wilshire to trendier hotels, Dornemann admits he’s turned off by the feverish pitch of Hollywood deal-making. He says Paramount makes no sense for him on the basis of a return on the investment. In the case of Castle Rock, he says he walked away because of the company’s long-term distribution agreement with Sony Pictures Entertainment. He also decries the stock-swap and debt-burden formulas behind many deals.

“It’s an advantage to understand these (deals) and not be seduced,” Dornemann said. “I can have many egomaniacs around me without becoming one myself. I like being invisible.”

Asked about companies that are making deals, Dornemann says: “It’s not bad to have our competitors tied up with all this debt. We’ll see who has the last laugh.”

Helping to shape Dornemann’s strategy is Strauss Zelnick, the former 20th Century Fox president who heads the Silicon Valley entertainment technology company, Crystal Dynamics. Zelnick has a formal consulting relationship with BMG. Dornemann says he confers on a more casual basis with Creative Artists Agency, the talent firm headed by Michael S. Ovitz.

Beyond that, the BMG chairman can sometimes be found in the company of other moguls. He counts MCA Music Group Chairman Al Teller as a friend and spends the holidays skiing in Aspen. Dornemann acknowledges he’s been linked at one time or another to discussions with everyone in the industry.

But he says he’s often on the receiving end of those overtures. “We are often flirted around,” he says. “But very often we don’t flirt back.”

That’s frustrating for a deal-driven community that sees dollar signs in Dornemann’s eyes.

When he was named chairman of BMG--which includes Arista Records, Arista Nashville, RCA Records and Zoo Entertainment--many colleagues assumed Dornemann would next set his sights on Hollywood as a way to solidify Bertelsmann’s position as an entertainment industry force--much in the way that London-based Polygram has gradually established a Hollywood foothold.

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But the 48-year-old executive has remained largely focused on the record unit.

BMG’s revenue rose 20% last fiscal year, to $3 billion, under Dornemann. The company also captured 14% of the international record market, largely due to “The Bodyguard” and Kenny G’s “Breathless” from Arista, run by industry legend Clive Davis. In addition, BMG reached international distribution deals with MCA/Geffen and Irving Azoff’s Giant Records.

On the downside, critics say Dornemann missed a chance to solidify his international position by passing on Virgin Music Group in 1992. Besides an eyebrow-raising $35-million deal with aging rockers ZZ Top, the company has abstained from the superstar bidding wars.

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Dornemann has also taken heat for failing to breath more life into the venerable RCA label.

He concedes RCA is still his “biggest challenge” but otherwise says he’s pleased with BMG’s performance. “It’s not correct to only look at one label,” Dornemann said.

As evidence of its aggressiveness, the executive points to a recent music channel deal with cable giant Tele-Communications Inc. The channel, which they hope to get off the ground domestically in 1995, would combine music videos with merchandising.

In the near future, Dornemann says he may also try to secure German distribution rights to an American movie and TV library.

He’s skeptical of the hype surrounding new technology, but says BMG is also looking into European opportunities that come from added TV channels.

After opening ritzy new BMG headquarters in Manhattan last year, Dornemann now spends about half his time in the United States, where he says he loses little sleep over his status as one of the industry’s biggest enigmas. “We are a cautious company,” he says. “I feel no pressure.”