Warner Music Rocking With Chaos

It’s panic time at Warner Music Group.

Two months after Chairman Robert J. Morgado’s dramatic corporate restructuring shook the foundation of the world’s biggest record conglomerate, sources say the company is in chaos and at risk of losing its top-selling rock act, R.E.M.

At issue is Morgado’s stormy relations with several top executives. Sources say Warner Bros. Records President Lenny Waronker, who was supposed to take control of the Burbank-based label early next year, is so fed up that he may resign.

If Waronker walks out, R.E.M. is expected to exercise a contract option and follow suit. Managers of other top Warner Bros. Records acts have also expressed concern about the future of the powerful label. On another front, executives at Interscope Records, whose acts include Nine Inch Nails, are said to be at an impasse over the possible sale of their label to Warner.

The main beneficiary of the revolt could be record mogul David Geffen, who is planning to start a label as part of his new studio partnership with director Steven Spielberg and former Walt Disney Studios Chairman Jeffrey Katzenberg. Sources say Waronker, R.E.M., outgoing Warner Bros. Chairman Mo Ostin and other defectees could all end up in Geffen’s camp.

“What we’re seeing is the dismantling of the most successful and stable label in the music business right before our very eyes,” said one Warner Music executive. “Morgado just keeps doing things that undermine the confidence of key executives.”

Morgado, who is based in New York, declined to comment. So did Waronker and Geffen. If the dispute cannot be resolved, Waronker would be the third executive to defect from Warner Music since August, when Morgado announced a restructuring that forced the exit of two of the industry’s most respected executives: Ostin and Elektra Entertainment Chief Bob Krasnow.

Ostin and Krasnow reportedly refused to implement what one senior executive characterized as Morgado’s “slash and burn” strategy to “gut” their labels’ staff and artist rosters.

“It was a tragic blow to every artist signed to Warner Bros. Records when Mo Ostin announced that he was going to leave his job,” said the manager of one of Warner’s biggest acts. “It’s going to be a real one-two punch if Lenny walks out the door. The only reason we signed with Warner was because of those two guys.”

Ironically, the upheaval comes at a time when Warner Bros. acts are dominating the record charts. R.E.M.’s “Monster” is the country’s No. 1 record. Warner Music leads in domestic market share, with 22.05%.

The management tensions appear to derive from Morgado’s effort to streamline Warner Music--the parent of Warner Bros. Records, Atlantic Group, Elektra Entertainment and Warner Music International. When the 50-year-old executive took over in 1985, the labels had a reputation for behaving like warring factions. To smooth out those problems, Morgado recently named Atlantic chief Doug Morris to manage the U.S. labels.

Other changes are also expected at the company, which boasts a diverse stable of recording acts that includes Tom Petty, Madonna, Jose Carreras, Stone Temple Pilots, Natalie Cole and Metallica.

Morgado, who will rank 19th on Entertainment Weekly’s upcoming Power 101 list, has been described by industry observers as “arrogant,” “insensitive” and too quick to take credit for the contributions of his key executives.

Last month, members of the hard rock group Metallica publicly blamed Morgado’s behavior as the reason they filed a lawsuit in San Francisco seeking to sever their decade-long association with Elektra Entertainment. Drummer Lars Ulrich said Morgado reneged on a former executive’s promise to restructure their deal.

Another misstep Morgado apparently made was the way he handled the courting of Sire Records chief Seymour Stein, who is said to be ready to leave the Warner Bros. fold to work at Elektra. Sources say Waronker was upset he was not consulted.

Sources say Morgado’s problems have even spilled over to his relationship with Interscope Records, the successful label founded by Ted Field and Jimmy Iovine and part-owned by Warner. Interscope has received buyout offers from other companies. Sources say Field and Iovine are still waiting for Morgado to weigh in with a counterbid that will allow them to stay. The price to Warner for acquiring the remaining 75% of Interscope is said to be $300 million. If Morgado makes the deal, sources say, Iovine could end up running Warner Bros. Records. If not, Interscope could join the parade to Geffen.

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Bidding buddies: Former Sony Pictures co-Chairmen and producing partners Jon Peters and Peter Guber ended up bidding against each other for the rights to “The Horse Whisperer,” a first-time book by British filmmaker Nicholas Evans, who is represented by Creative Artist Agency’s Bob Bookman. The bidding reached $2.5 million to $3 million late Thursday. Peters, based at Warner Bros., reportedly bid with actor Clint Eastwood. Sony-based Guber is partnered with Wendy Finerman. Disney is bidding on behalf of Robert Redford, and Paramount wants the book for the team of Scott Rudin and Sydney Pollack.