Culture Clash Clouds Warner-BMG Talks

One has spent his entire career in the record business, scouting for talent and working his way up just in time to see the industry start to crumble. The other is a former TV journalist who came to the music world two years ago as an outsider, and thinks he might like to stick around.

The unlikely pair may soon be straining to match steps as their respective companies continue a merger dance that promises to create one of the more unusual corporate combinations the entertainment business has seen.

Roger Ames, the music veteran, is chairman of AOL Time Warner Inc.’s Warner Music Group, home to such mainstays as Madonna and Metallica and fresher faces such as Sean Paul. Rolf Schmidt-Holtz, the former television reporter, runs the German-owned Bertelsmann Music Group, which has its own perennials, including the Dave Matthews Band and ZZ Top, along with such pop sensations as Justin Timberlake and Christina Aguilera.

Within weeks, representatives of the music conglomerates are hoping to strike a deal that would unite their operations in a single, jointly owned venture. The new entity has neither a name nor much precedent in a highly competitive industry. Conceived as a 50-50 partnership, it would seek to balance the assets and interests of fierce rivals in what suddenly could rank as the world’s biggest record company, ahead of Vivendi Universal Inc.’s Universal Music Group.

On paper, the combination offers an obvious opportunity to slash costs and bolster market share in an industry that is being pushed toward radical solutions by online piracy and falling sales. In the real world, it offers the challenge of deploying two strong and respected chief executives who bring with them not only differing backgrounds and styles but elements of corporate culture varied enough to recall the strange marriage of Time Warner Inc. and America Online.

“The past cultures of these companies have been vastly different,” said Los Angeles music attorney Peter Paterno, whose firm represents such acts as Warner’s Metallica and BMG’s Foo Fighters. “In a business context, I don’t think it works to have two disparate cultures living side by side. You’ve got to pick one, for better or worse, and run with it.”

Executives of the companies declined to be interviewed for this story.

For more than two months, deal makers have been closeted in talks about the proposed merger. According to people familiar with the discussions, the two sides appear to be creeping to an agreement, though major issues remain to be resolved, including the precise structure of the new management team.

Another thorny issue is the uncertainty of regulatory approvals: Three years ago, European regulators shot down the proposed union of Warner and British music giant EMI Group amid opposition from other music giants. Universal, Sony Corp. and EMI are almost certain to oppose a Warner-BMG combination that would threaten all three.

If a deal is reached the new company would have sales of about $6 billion a year and a worldwide market share of about 30%. In the U.S., the biggest music market, it would control six major labels, with Warner’s Warner Bros., Elektra and Atlantic alongside Bertelsmann’s Arista, RCA/J and Jive.

But the giant also would inherit an internal tension that is apparent in private conversations with executives from both companies.

One Warner insider, speaking on condition of anonymity, describes the stark lettering of BMG’s corporate logo as a source of “coldness.” The German-owned company, this person complains, favors disposable pop hits that may not mesh with a Warner system that nurtured the careers of such icons as Led Zeppelin, Prince and Madonna.

A BMG label executive, also requesting anonymity, says Warner has become staid and won’t risk money on the hottest prospects. Warner Music has been “plodding along,” the executive says, and doesn’t pose much of a competitive threat to BMG’s Arista or RCA/J labels, which have scored smashes with such acts as Avril Lavigne and Alicia Keys.

In the last major music deal -- the former Seagram Co.’s 1998 acquisition of Dutch giant PolyGram to form Universal Music -- the buyer’s culture largely prevailed. Industry observers say the Dutch company’s unique, multicultural bent quickly gave way to the hard-charging style of Seagram’s American label chiefs.

To avoid that sort of dominance game, Ames and Schmidt-Holtz would have to police potential conflicts among their subordinates. It wouldn’t be the first time: Both have undertaken sometimes painful steps to calm the waters at their companies after corporate upheavals. But the pair also would have to make room for each other, and for what insiders describe as a mutual tough-mindedness, born of different corporate experiences.

A native of Trinidad, Ames, 53, has the more hands-on approach of the two. Insiders say his laid-back style belies a shrewd competitor who is known for careful, even prolonged deliberation. As a boss, he has given his label captains wide latitude but keeps a watchful eye on the promotion of their priority albums.

Ames has endured corporate culture clashes before. After scoring a run of hits from pop bands Fine Young Cannibals and Bananarama while running Polygram’s London Records in the 1980s, he rose to head its global music division. But he wound up on the short end of the Seagram deal, left the company and in 1999 resurfaced, taking the reins at Warner’s sprawling operation. He arrived in the wake of a power struggle that drove out a dozen of the company’s top music executives -- and just in time for the political brawls that accompanied the AOL merger a year later.

As Time Warner and America Online division chiefs jostled for position, Ames won respect from “old media” insiders for his stance against the Internet executives, who believed Warner should use music as a free commodity to build online subscriptions at AOL. More recently, Ames led the industry to cut deals with Apple Computer Inc. to start an online store for downloadable songs, an effort that is being hailed as a major step toward reversing declines in sales of recorded music.

As Ames was watching Seagram overtake his employer in the late 1990s, German-born Schmidt-Holtz was emerging from a corporate fight that some Bertelsmann insiders believed was likely to cost him his career. Though credited with executing a turnaround at troubled magazine Stern, he had crossed swords with some senior executives at Bertelsmann’s Gruner & Jahr publishing division who had pushed to launch a conservative-leaning publication that Schmidt-Holtz feared would cost the company its credibility in journalism circles.

Schmidt-Holtz was overruled, and the new magazine bombed. The executive was soon persuaded to move on and take a co-chief role in the company’s TV operation, integrating it with another broadcaster to make Bertelsmann one of Europe’s biggest TV players. In 2001, Bertelsmann asked him to move again after the BMG music unit suffered a one-two punch: The company had ousted its senior management, and the named successor had died suddenly just days before he was slated to take the reins.

Though he came with no experience in the music business, Schmidt-Holtz orchestrated sharp cost cutting that helped return Bertelsmann’s music business to profitability. His style differs from Ames’. The 54-year-old Schmidt-Holtz is far more likely to dole out bear hugs and compliments, typically visiting BMG’s label executives in their own offices. It is a style that insiders say has won him the confidence of fiercely independent label chiefs such as RCA/J’s Clive Davis. Schmidt-Holtz has never claimed to have ears for the recording process, though he took a personal role in the promotion of last year’s hit compilation of Elvis Presley songs.

Stylistic differences aside, Ames and Schmidt-Holtz have both infused their companies with a more regimental feel in the face of a sagging music economy. The companies have laid off more than 2,000 people combined since 2001 and have sought to rein in costs. Under Ames, many label executives have had to cut out first-class airfares and have slashed promotional costs such as trade magazine advertising. At BMG, Schmidt-Holtz has forced executives to cut back on newspaper and magazine subscriptions and has cut back on the free snacks in office kitchens.

Even though both companies have undergone such cutbacks, however, some executives say their bosses’ differences suggest future tensions, especially when the inevitable next round of cost cutting begins. That is bound to test the chemistry between freewheelers, such as BMG’s Davis, and a more restrained operator like Ames.

“Clive will spend for perception any day of the week. That’s not Roger’s style,” one insider said.

Others see opportunity on the horizon. Irving Azoff, a veteran artist manager who represents such stars as Warner’s Steely Dan and BMG’s Aguilera, said he believed the corporate cultures would meld together and form a powerful new player.

“The economics of the business are so bad that this one works by necessity,” Azoff said. “They’ve got to be good partners.”