Bmg: Behind The Music

After starting slowly, the party pulsates into the wee hours in the presidential suite at the Beverly Wilshire Hotel. Music honchos dance between the staid furnishings. Suddenly, Pink, a hot young hip-hop singer, leaps onto an end table and bursts into her funky debut hit. The revelers, the top brass of Bertelsmann Music Group, lustily belt out the chorus, "There you go," which is also the song's title and a refrain that disses a loser boyfriend. BMG's reserved chief executive, Strauss Zelnick, gamely joins in.

The 43-year-old Zelnick, who became one of the world's top music bosses 20 months ago, wants to cultivate a cooler image. He was little known outside showbiz circles until his name surfaced late last year in two messy music-industry squabbles, one involving 'N Sync, the other Arista Records boss Clive Davis. Last week he surfaced again, this time to formally name Antonio (LA) Reid as Davis's successor. It's all in a frenetic day's work for Zelnick, the man who must steer BMG, the global music company owned by Germany's Bertelsmann, through perhaps the most turbulent time in the record business, thanks to industry consolidation, management turmoil and the rise of the Internet. The Harvard-trained lawyer-M.B.A. would seem to be an unlikely candidate for the job. The industry's old-guard leaders still consider him an outsider. At times his single-minded confidence, focus and ambition leave people feeling he's cold. His wife has jokingly nicknamed him "MKIA"--Mr. Know It All. So far, however, BMG is grooving to Zelnick's bottom-line approach, which has led to record financial results, RCA's revival and a leading jump onto the Internet. And Zelnick, a former Fox studio president, counts his outsider status as an advantage. "I looked at things in new ways," he says.

BMG's parent, Bertelsmann, is one of the world's largest media concerns--think Time Warner with a German accent. It's among Europe's largest TV companies and is the world's largest book publisher, with Random House as its flagship brand. BMG's artists range from Christina Aguilera to Toni Braxton.

But Zelnick, whom BMG hired five years ago to shape up its bloated North American music operations, must find a way to continue expanding BMG in an industry increasingly occupied by behemoths. Huge deals have reshaped the industry, leaving BMG by far the smallest of the major labels. Its rivals include Warner Bros. and EMI, which are slated to merge, and Seagram's Universal. Earlier this year, Bertelsmann CEO Thomas Middelhof seemed anxious enough about the competitive landscape to publicly raise the possibility of acquiring Sony Music (Sony wasn't for sale). For now, he's given BMG until the end of the year to bolster its position in the industry.

And NEWSWEEK has learned that Zelnick is lobbying his German bosses to conduct an initial public offering of BMG, a move that would raise hundreds of millions in deal-making dollars. For tax reasons, most companies favor deals for stock, not cash, so if BMG does sell shares, it would have an attractive currency for luring potential partners. Zelnick and Bertelsmann confirm they've studied the idea, but emphasize nothing is pending. Says Zelnick, "I think there may be an opportunity to do some major transactions, but it would be an overstatement to say that we need to do something."

Possible deals aside, last week BMG and Zelnick made a different kind of musical history. The promotion of Reid as CEO of Arista, BMG's crown jewel, to succeed industry legend Davis not only instantly makes Reid one of the most powerful label chiefs in the business. He becomes one of the industry's highest-ranking black executives. The back story to the momentous promotion shows a lot about Zelnick's determination. To promote Reid, Zelnick had to first get rid of the 67-year-old Davis, Arista's founder and a bona fide industry legend. The clash with Davis, who apparently had no intention of retiring, flared up during Carlos Santana's smash commercial comeback, which Davis stage-managed. Since Zelnick joined BMG in 1995, Bertelsmann had been nudging Davis to groom a successor. Despite Davis's continued success at Arista, the Bertelsmann bosses in Germany became increasingly concerned with his halting moves to address the matter.

The issue boiled over last fall, when BMG approached Davis about his employment contract, due to expire next month. Over dinner, Zelnick and his boss offered Davis several options. But Davis reportedly walked out of the meeting after his two bosses revealed their plans for Reid. Over the next several weeks, BMG came under increasing fire, with stars like Santana complaining publicly about Davis's shabby treatment. Rival record executives criticized Zelnick's skills at managing the temperamental talent that inhabit showbiz. Zelnick had predicted the reaction much earlier, telling a colleague: "I'm going to be known as the guy who fired Clive Davis." In spite of the bad blood, both sides are trying to fashion a deal for Davis to remain affiliated with BMG. "We are in serious discussions," Zelnick says. Davis declined to be interviewed, though his spokesmen confirm the negotiations.

In coming months Zelnick must confront an equally thorny problem, known in the music industry as the "other Clive problem." BMG currently distributes recordings for Jive Records, controlled by Clive Calder, which specializes in such pop hit-makers as Britney Spears and the Backstreet Boys. But the lucrative contract, which accounts for as much as one third of BMG's market share, expires this year, and Jive is said to be hotly pursued by other distributors. And Jive's and BMG's ties are strained. Zelnick and Calder squabbled over who would control the red-hot pop group 'N Sync--a battle Jive ultimately won, though BMG still gets a slice of the highly profitable 'N Sync business. Zelnick says he sees "absolutely no reason why Jive won't" remain with BMG. Jive declined to comment, citing the "strained" ties.

Given such challenges, the rapidly evolving world of Internet music may resemble a safe haven to Zelnick. Under his leadership, BMG staked out the Internet earlier than its rivals. A refugee from Silicon Valley, where he was president of a computer-game concern, Zelnick says he arrived at BMG "with a certain amount of religion" about cyberspace. BMG has forged a groundbreaking alliance with AOL that gives owners of CDs from BMG artists access to the Internet, and it joined with AT&T in early efforts to create a secure system for selling digital downloads. BMG's first online sales begin this summer.

And Zelnick is certainly looking the part of a music mogul these days. He goes to the gym with R&B hunk Tyrese. "I train Strauss Zelnick," boasts Tyrese. And Christina Aguilera, also on RCA, says she appreciates that early on "Strauss got the fact that I wanted to be perceived as a little more mature." During BMG's past year, Zelnick too has become a little more seasoned in the ways of the music world. Perhaps a bit more than he would like.