It's Time To Jam At Bmg

A new chief faces management turmoil and an EMI merger

To get an idea whether Rolf Schmidt-Holtz will cut it as chief of Bertelsmann's BMG Entertainment division, you could watch Berlin's Hertha soccer team play some weekend. Back in the mid-1990s, Schmidt-Holtz took over chairmanship of the team as part of a Bertelsmann effort to beef up its TV sports programming. That wasn't Schmidt-Holtz's day job--he was Bertelsmann's TV chief at the time--but colleagues recall he got so involved in Hertha that he attended crisis sessions with the coach. Since then, Hertha has gone from the bottom of the second league to sixth-place in Germany's first league, while attendance is up tenfold.

That's just one of the turnarounds on Schmidt-Holtz's resume. The 52-year-old has already led a reorganization of the company's TV holdings and last year initiated a merger with Pearson PLC's broadcast properties to create RTL Group. And he helped reverse a readership decline at Stern magazine, a Bertelsmann property, after taking over as publisher in 1988.

Schmidt-Holtz definitely has a tough game ahead of him at BMG. Management is in turmoil. The top two executives--President and Chief Executive Strauss Zelnick and Chairman Michael Dornemann--announced their resignations in November amid mediocre results. The company was further shaken in December when Rudi Gassner, Middelhoff's first choice to replace Zelnick, died of a heart attack. The disarray propelled two more top BMG execs to jump ship on Jan. 9: CFO Tom McIntyre and Chief Marketing Officer Kevin Conroy.

Even while he's rebuilding management, Schmidt-Holtz has to bring home a merger deal with London-based EMI. Together, BMG and EMI would surpass Sony Music as the biggest recording company in the world, with a roster including Radiohead and Ice Cube. Bertelsmann and EMI have reached broad agreement on terms, people close to the talks say.

The hard part, though, will be steering the merger past European Union competition authorities. Last year, antitrust problems forced EMI to abandon a planned merger with Time Warner Inc.'s music unit. Analysts believe EU Competition Commissioner Mario Monti is loath to see the number of music majors drop to four from five.

NAPSTER. Then there's Napster Inc., the renegade purveyor of file-sharing software that lets consumers download music without paying for it. Bertelsmann shook the music world in October by announcing its plan to turn Napster into a legitimate business. Now Andreas Schmidt, chief of Bertelsmann eCommerce Group, says Napster is close to perfecting software that will allow it to track what files users are trading. Such software is critical to charging consumers fees for the files. "The potential of Napster is almost limitless," says Schmidt. Yet so far the other music majors are still suing Napster for copyright infringement. "To date, our decision on Napster has always been negative," says Jean-Marie Messier, chief of Vivendi Universal.

Napster is more of a problem for Schmidt than Schmidt-Holtz, but the BMG chief will have to help figure out how to make sure Napster contributes to building music sales, not robbing them. BMG had earnings before interest and taxes in fiscal 2000 of $212 million on sales of $4.5 billion. Though profit was up 27%, it lagged rivals including EMI and Universal Music Group.

BMG will stretch Schmidt-Holtz's skills. Trained as a journalist, he has no direct experience in music. That won't matter as much if the EMI deal goes through. Analysts expect Ken Berry, the well-regarded president of EMI Recorded Music, to handle the creative end of the business. If regulators kill the deal, BMG could go months without an experienced music exec. This turnaround may not be so easy.

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