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Company Town | THE BIZ

Bertelsmann Plays Musical Chairs

November 28, 2000|CHUCK PHILIPS | TIMES STAFF WRITER

Nearly a year ago, Bertelsmann Chairman Thomas Middelhoff bragged of a business plan that would transform the Gutersloh, Germany-based media giant into the world's preeminent music company.

The reverberations from that pronouncement are now being felt throughout the music industry.

The 45-year-old German executive stunned rivals this month when he announced a pair of eye-popping alliances with British music behemoth EMI Group and controversial Napster Inc. He also shocked his own management team by overhauling the company's BMG record division in a move that was designed, at least in part, to drive out BMG honchos Strauss Zelnick and Michael Dornemann.

The swiftness and the secrecy with which Middelhoff has orchestrated each step of his global plan reveals much about his shrewd management style. It's a tale of power and manipulation that casts a cold light on the inner workings of the $40-billion music business, an industry where corporate titans rise and fall faster than hits on the pop chart.

Middelhoff's maneuvers prompted a sudden announcement on a Sunday afternoon this month that Zelnick and Dornemann were being replaced by Rudi Gassner, a former BMG executive whom Zelnick and Dornemann had earlier forced out of the company. Zelnick declined repeated requests to be interviewed. He has disputed reports that he was ousted, saying he resigned over differences with Middelhoff on how to run the company.

If successful, Middelhoff's efforts could rejuvenate BMG, which insiders say is expected to fall nearly $100 million short of its projected profit goals in the year ahead.

"BMG has gone through so many dramatic shake-ups," said Michael Nathanson, a media analyst at Sanford C. Bernstein & Co. "Nevertheless, if Middelhoff pulls off this EMI merger, he will not only be sitting on top of the largest record company in the world and saving millions through cost cuts and consolidation, he will also be buying into a much more stable team of music managers."

The following behind-the-scenes account of the sweeping changes is based on interviews with a dozen top industry figures familiar with the turmoil, including executives employed by Bertelsmann. All of these people spoke only on condition of anonymity, citing concerns about their careers.

It is well known in music-industry circles that Gassner, 57, and Zelnick, 43, have been at odds for years.

The falling-out began in 1994 when Dornemann hired Zelnick, a buttoned-down Harvard MBA with no music-business experience, to run BMG's U.S. division. When Dornemann promoted Zelnick four years later to chief executive of the global music group, many viewed it as a slap in the face to Gassner, who had been angling for the job for more than a decade.

Their most recent rift erupted in October of last year after Zelnick disregarded Gassner's advice on how to handle a series of disputes between BMG and two label heads--Arista Records founder Clive Davis and Zomba Music chief Clive Calder.

Zelnick told Middelhoff that BMG could save money by replacing Davis with a younger successor and could prevent pop group 'N Sync from jumping ship to Zomba by suing Calder and seeking an injunction against the singers to block the release of their next album.

Gassner, who had run BMG's international arm for more than a decade, disagreed. He thought BMG should try to resolve the matters quickly and quietly out of court. Zelnick brushed Gassner's suggestion aside--some say with the intention of forcing him out.

On Jan. 5, Gassner became so enraged he decided to quit and fired off an e-mail to Middelhoff explaining why. In the e-mail, Gassner harshly criticized Zelnick's management style--particularly his handling of the Arista and Zomba debacles, which ended up costing BMG more than $200 million.

"As someone who has spent much of his life helping to build BMG, I must warn you that the future of this company is in danger if you leave it in Strauss Zelnick's hands," Gassner wrote in the e-mail, a copy of which was obtained by The Times. "The Bertelsmann management should accept that it was a mistake to appoint him and consequently change the leadership."

On Jan. 31, Bertelsmann issued a brief statement announcing Gassner's resignation.

By April, Mark Woesnner, a veteran Bertelsmann power broker viewed as Dornemann's mentor and protector, was considering stepping down as chairman of the corporation's supervisory board. Insiders said that, once Woesnner left, Middelhoff would restructure BMG and push Dornemann--and possibly Zelnick--out the door.

In June, Middelhoff invited Gassner to lunch at a New York hotel. During the meal, Middelhoff stunned Gassner, asking him whether he would consider returning to BMG to replace Zelnick and Dornemann to run a restructured global-music division, according to sources close to the negotiations. The next day, Gassner e-mailed Middelhoff, accepting the offer. Middelhoff told Gassner he would get back to him as soon as he could figure out how to make it happen.

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