Execs Will Depart BMG In Wake of Napster Settlement; Rumor of EMI Deal

Two top executives at Bertelsmann Music Group will depart in the wake of the company's recent settlement of its lawsuit against Napster. Citing irreconcilable differences with parent company Bertelsmann AG over company strategy, BMG chief executive Strauss Zelnick and chairman Michael Dornemann announced their resignations Sunday November 5.

Zelnick will leave on January 1; Dornemann will depart on July 1. Fifty-seven-year-old Rudi Gassner, a music industry veteran with more than 30 years' experience and a former BMG international operations executive who resigned last January, will return to assume the duties of both men. Gassner has signed a five-year contract.

BMG apparently takes very good care of its executives when they are put out to pasture. Zelnick will collect approximately $20 million on the remaining two and a half years of his contract, and has been given a sinecure with the company as a "nonexecutive chairman," with an office in BMG's New York headquarters, presumably until he decides his next move.

The departures of Dornemann and Zelnick are the culmination of prolonged disputes and palace intrigue within the company. Bertelsmann CEO Thomas Middelhoff's approval of the settlement-and-partnership deal with Napster was apparently the final straw for Dornemann, who had been loyal to Middelhoff's predecessor, Mark Woessner. Announcing his resignation, Dornemann expressed no ill will toward Middelhoff or other Bertelsmann executives. "There is nothing personal," he told reporters. "It's a generation change, and I believe it's totally normal that a new generation looks for a new team."

Since Zelnick took the helm of BMG's North American operations in 1994, the company's share of the album market has risen from 13.35% to 19.4%. The company's overall share of the music business is second only to Seagram Ltd.'s Universal Music Group, but approximately one-third of BMG's market share is attributable to a distribution deal with Zomba Recording Company, parent of Jive Records, the label of Britney Spears and the Backstreet Boys. Last year, Zelnick took Zomba to court after the company signed "boy band" 'N Sync away from BMG's RCA label, and was roundly criticized by colleagues, including Gassner, for suing a business partner. BMG and Zomba settled out of court, with an agreement that extended BMG's distribution deal for an additional year.

Zelnick also took considerable flack for his insistence on the retirement of music business legend Clive Davis, whose Arista Records had helped lift BMG out of the doldrums. Davis did retire from Arista, but not before he secured a $150 million commitment from Bertelsmann for a 50% stake in his startup venture, J Records. In the wake of the bad publicity generated by the Davis incident, Middelhoff removed the BMG record clubs from Zelnick's purview and made them part of Bertelsmann's e-commerce group under the direction of Andreas Schmidt.

In addition to a partnership with Napster, BMG is now looking at an alliance—executives are hesitant to call it a "merger" or "takeover"—with Britain's EMI Group PLC. A proposed $20 billion merger between Warner Music and EMI came to an abrupt end last month when European Union commissioners decided the combined companies would amount to a monopoly of the European music market. No serious negotiations with BMG have taken place, according to EMI officials. Walt Disney Company and News Corporation are also reportedly interested in EMI, the world's third-largest music company.

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