Discord With Record Labels Threatens BMG’s Big Moment

It doesn’t get much better than it got this week for Bertelsmann Music Group.

BMG, a division of German media giant Bertelsmann, rules the music sales chart with six of the 10 top-selling albums in the nation and commands 19% of the U.S. market.

Bertelsmann’s board of directors ought to savor the moment though, because it might not last long.

The reason: Five of those BMG blockbusters were delivered by Arista Records head Clive Davis and Zomba Group chief Clive Calder--industry veterans with whom BMG’s corporate managers are at war. The two executives, whose contracts expire within months, are locked in a behind-the-scenes battle with BMG chief Strauss Zelnick that could force their departure and dramatically alter the future of the company.

The company faces not only a significant plunge in market share but also a credibility crisis in the creative community. Zelnick’s moves have infuriated a throng of BMG artists, including Aretha Franklin, Patti Smith and Carlos Santana, some whom have threatened to jump ship. Rival labels have already begun to capitalize on the chaos at BMG to discourage new groups from joining the company.

The corporate drama unfolding at BMG is drawing comparisons to a similar upheaval five years ago that decimated Time Warner’s music division, which has since fallen to fourth from first place among the world’s five recording giants in sales of current albums in the United States.

In the Time Warner debacle, the board relied upon the advice of corporate managers who made a series of missteps that led to an exodus of top executives and artists as well as a massive erosion in profit and market share. Before the turmoil was over, Time Warner actually attempted to rehire several of the music veterans who were ousted and fired the corporate figures who pushed them out.

The question is: Will BMG’s board learn from history or repeat it?

“BMG is laying the groundwork for a repeat performance of exactly what happened at Time Warner,” said the chairman of one competing label. “To me, Strauss Zelnick is no different than Bob Morgado. The way he’s handling things is almost a mirror image of what prompted Warner’s downfall.”

Zelnick declined comment.

Five years ago, a power struggle between corporate music chief Robert Morgado and Warner Bros. Records’ Mo Ostin began as a demand for a succession plan but devolved into a corporate blood bath that dragged on for years, gutting the management team and shattering the morale of thousands of employees. The fallout also spread overseas, where sales of American superstars released by Time Warner began to slip.

Once the dominant and most respected operation in the record business, Time Warner dwindled in credibility, and its share of current album sales in the U.S. music market has shrunk to 14%, from 22.36% in 1995, according to SoundScan. Over the course of several years, Morgado and his predecessor, Michael Fuchs, alienated many of Warner’s biggest stars by firing or forcing out nearly a dozen of the company’s top executives, including Doug Morris, Ostin, Lenny Waronker and Jimmy Iovine.

Many of those executives ended up working for companies owned or distributed by Seagram Co.’s Universal Music Group, which has surged ahead of Warner to take over as industry leader. This year, Sony and BMG also surpassed Warner in sales of current albums in the U.S.

BMG’s troubles began several months ago, when Zelnick locked horns with Clive Calder, head of BMG-distributed Zomba Group, which releases music by pop stars Britney Spears and the Backstreet Boys. Zelnick accused Calder of trying to poach ‘N Sync, a pop group on the BMG-owned RCA label, with an improper contract offer and decided the corporation should file a lawsuit against Zomba.

Sources say Calder, whose deal with BMG expires early next year, quickly began fielding offers from competitors such as Universal and EMI Group. If Zomba leaves BMG, the German conglomerate would instantly lose nearly a third of its 19% share of the U.S. music market--driving BMG from second to last place in music sales.

This month, Zelnick began scrambling to patch up his relationship with Calder after a court rejected an attempt by BMG to stop ‘N Sync from releasing its next album on Zomba before the case went to trial. He backed off his hard-line stance and began negotiations to allow Calder to keep ‘N Sync on Zomba’s roster in exchange for a one-year extension of Zomba’s distribution deal with BMG, sources say.

If all parties sign on to the new pact, sources say, BMG could make an announcement as early as this week indicating that the two companies have resolved their differences and that BMG plans to drop its suit against Zomba.

BMG’s troubles with Arista’s Davis are another matter entirely.

Davis’ company, which scored the No. 1 album in the nation this week with Notorious B.I.G.’s “Born Again,” also contributes about a third of BMG’s market share and is considered the strongest asset in its U.S. repertoire. Arista releases music by such stars as Aretha Franklin, Whitney Houston, Carlos Santana and Patti Smith.

Davis launched the label 25 years ago and has run it autonomously with great success, resisting pressure from the corporation to come up with a succession plan. The 66-year-old executive’s fight with BMG began in November when Zelnick informed him that the corporation intended to install Antonio “L.A.” Reid as president of Arista.

Zelnick believes the move is necessary because he is concerned about the future of the label upon Davis’ eventual departure. But Davis, whose contract expires in June, sees it as a ploy to reduce his power at the label and ultimately push him out the door. Sources say Davis has already been approached by several of BMG’s competitors, including Time Warner.

Artists and executives on the label have come out in force to voice their outrage over the prospect of Davis’ ouster.

“If Clive leaves, I leave,” said singer Franklin in a phone interview. “ . . . If Clive left, it could very well mean the demise of the company. There are only a few record executives on the face of the Earth who love music the way this man does.”

Smith, who has been signed to Arista since 1975, agreed.

“Clive Davis built this label out of the clay of his soul,” Smith said in an interview. “There is nobody like him in the music business. He’s like Robert Duvall in ‘Apocalypse Now.’ I mean, he loves the smell of vinyl in the morning. Without Clive, there’s no place for me on Arista Records.”

Sources say BMG is unhappy that its boardroom battles with Davis have spilled over into the media, where they contend that accounts of the Arista’s profitability have been greatly exaggerated. BMG sources say the label operates with an extremely high overhead and wastes vast sums of money promoting single recordings. Those sources say the label is expected to generate only $25 million in profit this year on $500 million in revenue.

Other sources inside the company, however, say Arista is likely to contribute about $40 million in U.S. profits to BMG’s bottom line this year, while also providing an additional $40 million in U.S. distribution fees to the corporation as well as a further $20 million to BMG’s foreign revenues.

Two weeks ago, Davis attended a three-hour meeting with Zelnick’s boss, Bertelsmann chief Michael Dornemann. Sources say the meeting was amicable but that nothing of substance was resolved.

Dornemann scheduled the meeting soon after some of BMG’s foreign directors expressed concern to him about the possible negative effect that Davis’ departure could have on the company’s international sales. Competitors say the BMG board should pay more attention to the fact that American music by such Arista stars as Houston, Kenny G, Franklin and Santana sells strongly overseas.

“Over in Germany, where the Bertelsmann board sits, this all may seem like some little American problem that will have no impact on BMG’s overseas business,” said the chief of another competing music company. “But it will. Look at what happened to Warner’s international business after the turmoil. It never recovered. The Bertelsmann board ought to wake up.”