Zomba Dispute Sounds Sour Note at BMG

The distance between the top and the bottom of the record business is not very far--as Bertelsmann Music Group may soon find out.

BMG rules the sales chart this week with the top six best-selling albums in the nation, but the German conglomerate could quickly plunge to last place if a key affiliate, Zomba Group, breaks away in June as expected. BMG distributes the records produced by Zomba, and losing the label would cost BMG nearly a third of its 15% share of the U.S. market, not to mention three of its biggest pop stars: Britney Spears, Backstreet Boys and ‘N Sync.

Zomba’s exit would be a severe blow to Strauss Zelnick, the polished 42-year-old Harvard MBA whom BMG recently elevated to global record chief. Zelnick earned his promotion in part because of the perception that he had rejuvenated BMG’s sluggish U.S. division by cutting costs and developing strong relationships with the record chiefs who deliver the hits from the corporation’s labels and independent affiliates.

That was apparently not the case with Zomba chief Clive Calder, whose distribution deal with BMG runs out in June. Last week, BMG sued Zomba, accusing Calder of luring pop sensation ‘N Sync away from its RCA division with an improper contract offer.

The battle pits Zelnick, whom critics characterize as a corporate suit with a penchant for self-promotion, against Calder, a reclusive but ferocious entrepreneur with decades of experience in record industry warfare. Zelnick, former president of Fox TV and president of the independent film company Vestron, was well-known in Hollywood before entering the music business as head of BMG’s U.S. operation.

Whichever company wins the fight over ‘N Sync, there is little doubt Calder has the upper hand regarding Zomba’s future.

All four of BMG’s competitors are licking their chops over the prospect of signing a deal with the most successful independent label in operation. If EMI Group, which ranks last in U.S. market share, was able to snatch Zomba away from BMG, the two corporations would trade places. (Universal would remain No. 1 in U.S. and global market share, propelled by its merger with PolyGram last year.)

The Zomba clamor underscores the volatile dynamics of the hit-driven record business. It also throws back the curtain on the smoke-and-mirrors antics of an industry that often seems more concerned with hype than profit. Although corporate music chiefs regularly boast about market share derived from distribution deals with independent labels, they typically offer no input into developing hit artists and take almost none of the profit.

In Zelnick’s case, three of BMG’s top six acts this week--Spears, Backstreet Boys and Creed--are signed with Zomba and Wind-Up, independents whose deals soon expire. Santana’s No. 1 album was delivered by BMG’s Arista division, which is run by industry veteran Clive Davis, who preceded Zelnick’s arrival at the company and runs his label autonomously. (If you subtract Davis’ contribution to BMG’s market share this year, the company’s total percentage of sales would shrink an additional 5%.)

That leaves RCA acts Christina Aguilar and Lou Bega. Bega came to the U.S. from BMG’s international arm, which has been headed by Rudi Gassner for more than a decade.

Even Zelnick’s critics concede that RCA has undergone a significant transformation since he hired Bob Jamieson and Jack Rovner to revive it. Once considered an industry laggard, the label has scored a string of pop hits in recent years--although its current and total market share has continued to hover between 2% and 3%, not much compared with other major labels.

That is not to say that BMG’s fortunes have not improved since Zelnick arrived five years ago. Sources inside BMG credit the former TV and movie executive with streamlining its once-bloated U.S. division, spearheading its Internet strategy and restructuring its record club, RCA and Windham Hill labels. The company says global revenue has grown from $3.5 billion to $4.6 billion since 1994.

Zelnick’s appetite for public attention, however, often rubs executives inside and outside BMG the wrong way, a number of whom privately say they are tired of hearing his accomplishments exaggerated in the media.

“We own pop music,” Zelnick bragged Sept. 8 to the New York Daily News--just one week before war broke out between BMG and Zomba. Zelnick’s critics say he soon may regret those words.

Although it’s not unusual for record labels under the same corporate umbrella to compete for unknown acts, it’s virtually unprecedented for a label chief such as Calder to poach an established act from a sister label’s roster. The battle with Zomba, competitors say, illustrates a weakness in Zelnick’s management style, which could end up costing BMG two of its strongest assets.

While observers criticize Calder for ruthlessly poaching the band behind Zelnick’s back, they also criticize Zelnick for misreading his relationships with the aggressive entrepreneur and with ‘N Sync. The pop group signed its deal with Zomba just a few days after Zelnick met with ‘N Sync to help keep the band happy by renegotiating a new deal at RCA-affiliated Trans Continental.

Before BMG sued Zomba last week, sources say Zelnick tried desperately to negotiate a solution to the conflict. Sources said BMG executives discussed a joint-venture proposal involving the next two albums from ‘N Sync from which Zomba would retain the bulk of the profit. In return, Zomba would extend its distribution deal with BMG for another year. But the discussions collapsed and BMG filed suit.

Calder and Zelnick declined comment, but sources say Calder’s move on ‘N Sync may be part of a ploy to renegotiate a better deal with BMG.

Calder joined BMG in the early ‘90s and sold the German conglomerate 20% of the U.S. arm of his Jive label, home to such stars as Spears, Backstreet Boys, R. Kelly and Too Short, and 25% of his Zomba music publishing company, home to such acts as Macy Gray, Korn and Limp Bizkit. BMG derives no income from Zomba music sold outside the U.S., where Calder has created his own independent global distribution network.

There is speculation in the industry that Calder may try to use ‘N Sync as a bargaining chip with BMG to regain control over the domestic chunk of Zomba he sold to the conglomerate. Sources say no negotiations have taken place between Zomba and BMG since the lawsuit was filed.

If Zomba wins the battle over ‘N Sync, sources say BMG could lose an estimated $28 million in revenue on the pop act’s next two albums--not to mention the market share it would shave off RCA’s total sales.

It may challenge even Zelnick’s formidable skills to put a positive spin on BMG entering the millennium without ‘N Sync, Backstreet Boys, Spears and whatever future pop stars Zomba may unleash on the pop scene.