Davis Rises From Exile to Star for Beleaguered Bertelsmann

Clive Davis is having the last laugh.

Barely a year after being driven from power at Bertelsmann’s Arista Records, Davis is back on top with a new label and a new artist.

“Songs in A Minor,” the debut from Davis discovery Alicia Keys, sold 236,000 copies in its first week to capture the No. 1 spot on Billboard magazine’s U.S. pop rankings. It’s the third top 10 debut for Davis’ new J Records label in less than eight months.

“What can I say? It feels incredible,” the 68-year-old entrepreneur said in a phone interview from Italy, where he was preparing Keys to perform a showcase for the European media. “Alicia is mesmerizing. I would’ve been happy to sell 60,000. She moves me. People forget what this business is about. Raw talent. Great songs. Hip artists. All anybody seems to care about now is numbers. The fact is you can’t make numbers without creativity.”

Still, J is losing money. It could take several years for Davis and his executive team to turn a profit at his new venture by transforming unknowns such as Keys into the industry’s next superstars.

Davis’ sudden rebound is a mixed blessing at Bertelsmann, the German media conglomerate that put up the cash to get his new joint venture off the ground.

On the one hand, J is the only label currently delivering hits for Bertelsmann Music Group--and it is doing so much earlier than expected.

Indeed, the sales projections for Keys’ debut must be welcome news to a media conglomerate whose last-place music division recently lost $150 million and faces worldwide job cuts in the months ahead.

But J Records would not exist if the previous BMG regime had not attempted to force Davis to leave Arista, a label he had founded 25 years earlier and transformed into the music division’s crown jewel. Arista generated more than $80 million in profit and fees during Davis’ last year.

Caught up in a corporate power play, Davis was told he was too old and his contract too rich to renew.

Intending to fight his replacement by a younger executive, Davis galvanized a throng of top Arista stars who threatened to jump ship and used the media firestorm to pressure BMG into giving him an even richer deal.

Bertelsmann officials declined to comment for this report, but high-level sources in the company privately acknowledged that BMG would be better off today had Davis never been pushed out of Arista.

What started out as a face-saving move for BMG ended up becoming the most expensive start-up label in the history of the music business. The $150-million J deal was unprecedented not only because of its size, but also because Davis persuaded BMG to let him raid Arista of dozens of top executives and artists, including Keys, to get his new venture up and running.

The battle with Davis not only harmed Arista, but it also triggered a massive shake-up within the entire BMG unit--from which the company is still reeling.

BMG head Strauss Zelnick and his boss Michael Dornemann, the executives who locked horns with Davis, were eventually shown the door. Bertelsmann chief Thomas Middelhoff ousted the pair after stepping in to calm the waters with Davis and Zomba Group’s Clive Calder, another key record chief with whom Zelnick had clashed over pop act ‘N Sync.

In November, Middelhoff announced that former BMG global chief Rudi Gassner would replace Zelnick, but Gassner died unexpectedly of a heart attack just days before taking the reins at BMG. Middelhoff then installed Rolf Schmidt-Holtz, a former television executive and chief creative officer at the German media conglomerate, to run BMG.

Middelhoff and Schmidt-Holtz decided to clean house even further this year after learning just how badly BMG was hemorrhaging. The technology division alone, sources say, lost more than $30 million in dot-com investments and Web site ventures. An additional exodus of executives followed, including former tech guru Kevin Conroy and European chief Richard Griffiths.

Middelhoff has said he is considering a variety of cost-cutting programs as BMG grapples with its eroding position in the U.S. market and elsewhere around the world. Now that his plan to merge with British music behemoth EMI Group is on the rocks, it is unclear how BMG can bounce back.

Sales at Bertelsmann’s RCA and Arista divisions have been tepid this year. Neither has come close to matching the profit that Davis generated at Arista before BMG forced him out the door.

Davis, whose discoveries include Janis Joplin and Whitney Houston, said he is just glad to see his new acts already making waves.

“I take nothing for granted,” Davis said. “I love sweating over the small stuff. That’s what creative executives do. We use our ears and wits and assemble the best team we can. That’s what I’ve got here. It was a giant challenge to get this label off the ground. So far, so good.”