"I am very proud of what my team has accomplished. The company has achieved record revenues and profits and significant increases in current and overall album share."
——Strauss Zelnick on exiting BMG


BMG Front-Office Shake-Up Comes
In Wake of Napster Move
What did Napster really cost German media giant Bertelsmann?

Less than a week after announcing a controversial deal with the legally challenged file-swapper, Strauss Zelnick and Michael Dornemann, Bertelsmann's two highest-ranking music executives, have resigned.

In a surprise move, after six years as BMG President/CEO, Zelnick resigned, effective Dec. 31, while Dornemann, executive board member in charge of BMG Entertainment, has decided to step down from the Bertelsmann executive board, effective Dec. 31.

Dornemann had earlier told Bertelsmann that he planned to step down as BMG Chairman in June 2001, when his contact expires. Bertelsmann had then offered Zelnick the BMG chairmanship, but the arrangement also would have lessened Zelnick's responsibilities as CEO.

Sources said he has about three years left on his contract and is walking away with a sizable severance package that could be as high as $50 million.

Sources say Zelnick will be replaced by former BMG International President/CEO Rudi Gassner, who will be effectively named head of the German media giant's music division. Gassner left BMG in January of this year, which increased Zelnick's power base at the time. Most recently, Gassner was elected Chairman of edel music's supervisory board on Sept. 1. Prior to joining BMG, Gassner spent 18 years in the PolyGram organization.

Joining Gassner on the board is Arnold Bahlmann.

Zelnick's move came only one day before Bertlesmann was about to announce a restructuring of the U.S. company that was not expected to include either Zelnick or Dornemann.

In an e-mail to selected journalists and friends, Zelnick wrote: "After six extraordinary years with the company, I feel this is the appropriate time for me to pursue new challenges. I am very proud of what my team has accomplished. The company has achieved record revenues and profits and significant increases in current and overall album share."

Zelnick and Dornemann had widely been credited with turning the music major into a U.S. powerhouse during their tenure. Under Zelnick's leadership, BMG enjoyed record revenues and profits while operating at the lowest cost in the industry. BMG's current album share has grown from less than 13% in 1994 to almost 20% year to date. In addition, the company's overall album share has grown from under 12% to more than 16% and its singles share has grown from 19% to 22% percent.

Zelnick decided to step down from his current position to pursue new challenges, a company release said.

Dornemann, meanwhile, by resigning, according to the announcement, will facilitate the restructuring of Bertelsmann's TV, music and new media divisions and allow for a swift transition. Dornemann will remain in his role of Chairman, BMG Entertainment until the end of the fiscal year (June 30, 2001) to assist with the transition and to ensure management continuity. His contract does expire in June.

Subsequently, he will maintain a relationship with Bertelsmann in various functions.

Zelnick joined BMG in January 1995 as President/CEO of the company's North American business unit and was named President/CEO of BMG Entertainment in July 1998.

In addition to the company's commercial success, BMG, under Zelnick, has been instrumental in establishing BMG as an industry leader in the digital space, including the 1999 formation of the online commerce and content joint venture GetMusic with Universal Music Group.

Before joining BMG Entertainment, Zelnick was President/CEO of Crystal Dynamics, a leading producer and distributor of interactive entertainment software. Prior to that, he worked for four years as President/COO of 20th Century Fox.

Dornemann has been with Bertelsmann for 18 years, including 16 years as an active member of the executive board. He and Mark Woessner, then Chairman of Bertelsmann AG, together orchestrated the acquisition of Doubleday book publisher and the record label RCA.

There have been rumors of an increasingly strained relationship between Zelnick and Dornemann and Bertelsmann Chief Thomas Middelhoff, who has actively been moving more into the music realm.

Just last week, Middelhoff announced the controversial deal with Napster, which may have been the final straw for Zelnick and Dornemann, sources said.

Many believe by doing the Napster deal, Bertelsmann has drawn new battle lines with the other majors in the ongoing conflict surrounding music and the Internet.

The resignation of Zelnick and Dornemann comes amid reports that BMG is looking to merge its music unit with EMI. Middelhoff is reportedly keen on joining the two companies together. Time Warner and EMI called off a merger of their music businesses after the European Commission indicated they wouldn't approve the deal, which paved the way for approval of AOL's $155 billion purchase of Time Warner.