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"It's quite normal for someone to want his own team and to reorganize...I came to the conclusion that I couldn't support these changes and didn't want to stand in the way."
—–Michael Dornemann

QUESTIONS ARISE AS ZELNICK, DORNEMANN RESIGN

Surprisingly, Not One Of Them Is
"Who Let The Dogs Out?"
While news of BMG President/CEO Strauss Zelnick and BMG Chairman Michael Dornemann's stepping down, and the imminent naming of Rudi Gassner as the company's new Chief spread like wild fire over the weekend, the impact of the high-level executive shuffle will likely be felt for months.

Indeed, several recent Zelnick-initiated moves have yet to fully run their course.

How will newly appointed Arista head, Antonio "L.A." Reid, named to the post by Zelnick, react to his boss' abrupt departure? What about Clive Davis' J Records, which signed a large joint venture deal with Zelnick? Will Clive Calder's Jive Records re-up at BMG without Zelnick in house, or will a deal be more accessible? How much of a role did the loss of RCA's top-selling act NSYNC play in Zelnick's resignation? Will this reshuffling affect the expected promotions of RCA chiefs Bob Jamieson and Jack Rovner, which have been expected to be made by Zelnick for months?

These are just a few of the many questions being asked following Zelnick's surprise departure. Many, however, believe that Zelnick's bottom-line directives played a role in these and other deals, causing animosity at times. Widely publicized battles with the two Clives and the loss of NSYNC surely did not help the Zelnick-Dornemann team in the eyes of bosses at parent Bertelsmann

And, will Bertelsmann's own music moves, under Chairman Thomas Middelhoff, like its controversial deal with Napster, its starting of its own music Internet division separate from BMG's and its purchase of CDNow, prove financially sound? Middelhoff's aggressive pact with Napster underscores his impatience with his company's standing in the global music marketplace.

Despite great runs in the U.S. and international marketplaces of late, a power struggle at the highest level at the German media giant has been going on for some time now.

The latest reshuffling comes less than a week after parent Bertelsmann inked a controversial deal with legally challenged Napster, possibly drawing new battle lines with the other majors in the ongoing conflict surrounding music and the Internet.

Rumors of Dornemann (who has been at the company for 18 years) and Zelnick (atop BMG for six years) leaving the fold have been circulating on and off for months, but restarted with greater intensity this week after the Napster deal closed. Middelhoff's online guru Andreas Schmidt, head of the relatively new Bertelsmann e-Commerce Group, is largely credited with having sealed the Napster deal.

Both Dornemann and Zelnick were said to be unhappy with the company's move to restructure their positions and diminish BMG's oversight in the television and Internet areas, which was expected to be announced today (11/6).

Middelhoff, as part of the online distribution restructuring expected to come down today, is said to be dividing the company into three divisions: content, media services and direct-to-customer businesses. As a result, responsibility for the music clubs and online music distribution will be placed under the control of Schmidt.

These changes, as well as the executive shuffling, offer insight into how Middelhoff, who rose to power in 1998, is trying to put his stamp on the company and move all of its businesses onto the Internet. With these moves, Middelhoff is effectively putting all e-commerce duties in the hands of his computer-savvy executives while forcing BMG execs to focus on making music and artist relations, sources said.

"It's quite normal for someone to want his own team and to reorganize," Dornemann told the Wall Street Journal. "But then you have to decide whether what's being done is right or wrong. And I came to the conclusion that I couldn't support these changes and didn't want to stand in the way."

While both Dornemann and Zelnick said they backed the Napster deal last week, sources said the surprising move did face some opposition, at least initially by Zelnick. Dornemann and Zelnick were said to have very little input in the CDNow purchase and Napster deal, both of which clearly fall under their domain as music heads of the company, sources said.

"I respect the new generation at the company, but there's a different viewpoint," Dornemann told Reuters on Sunday (11/5).

"By taking this step, I will facilitate the restructuring of Bertelsmann's television, music and new media divisions and allow for a swift transition," Dornemann said in a letter to employees. "I will also assist with the transition to ensure management continuity. Subsequent to my departure, I will maintain a relationship with Bertelsmann in various functions."

Sources said Dornemann told the board he was planning to resign in June when his contract expired. Bertelsmann then offered Zelnick the additional role as Chairman, but at the same time was stripping some of his functions as CEO including overseeing Internet operations, sources said.

The power struggle at the German giant is nothing new and can be traced back to the departure of Bertelsmann top dog Mark Woessner.

In September, Woessner stepped down as Chairman of the company's supervisory board. Woessner had long been viewed as a mentor and protector of Dornemann. When Woessner left, sources said his departure would likely foreshadow a larger shakeup (HITS, 7/7), which has resulted in this weekend's exits. Those sources sure knew what they were talking about.

Middelhoff and Dornemann once vied for the Bertelsmann Chairmanship when Woessner stepped down, with Middelhoff eventually winning the position. Insiders said that Middelhoff then helped engineer Woessner's resignation from the supervisory board.

On the label side, Middelhoff, as Chairman, reportedly was not pleased last year when BMG's battles with Davis and Calder spilled out, and when RCA lost its top-selling act NSYNC to Jive, which could cost the company elephant bucks.

Zelnick, when faced with the corporate restructuring, in which responsibility for the music clubs (BMG Direct) and online music distribution (CDNow, Napster) will be placed under the control of Bertelsmann's e-commerce group and not the entertainment division, contended that his contract had been breached and decided to leave the company.

Zelnick, while widely acknowledged for turning BMG's operations around, has been criticized in the past for not being a "true" music man. The other label group heads–Doug Morris, Roger Ames, Ken Berry and Thomas Mottola–have been entrenched in the music wars for years.

In a letter to BMG employees, Zelnick said: "Together we have built BMG into a competitive powerhouse, and I feel this is an appropriate time for me to pursue new challenges. I am proud of our numerous accomplishments: the turnaround of RCA and its emergence as an industry leader; BMG Direct's growth to become the No. 1 record club in the world, and its launch of one of the most visited e-commerce sites in the world; an unprecedented number of Grammy Awards; record revenues and profits; and BMG's leadership role in the digital revolution."

Gassner, who will be named Chairman and CEO of BMG, has been in the music industry for over 20 years. The executive, no stranger to Bertelsmann politics having previously served as BMG International President/CEO, was also caught in a power struggle at the company, losing out to Zelnick, who with Gassner's January exit, was charged with overseeing worldwide operations.

At 57, he is just three years away from the mandatory retirement age for Bertelsmann executives and is therefore most likely an interim solution to give Middelhoff time to seek a replacement.

"Thomas Middelhoff presented me with the opportunity to lead BMG into an exciting and challenging future, and I am honored to accept," said Gassner. "To be able to return to a company I know and love as much as BMG, with the clear, singular charge of developing our music, is truly a dream realized. I, and every single member of the BMG family, will concentrate exclusively on the development, marketing and distribution of music."

As head of BMG International, Gassner helped build the division into a $2.4 billion unit of BMG's total revenues of $4.6 billion.

Gassner was most recently elected chairman of edel music's supervisory board in September.

Prior to joining BMG originally, Gassner spent 18 years in the PolyGram organization.

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