BMG Deal for Label Signals Ugly Showdown

The entertainment board of Bertelsmann Music Group is gathering this morning in New York to give the green light to the purchase of LaFace Records--a move that is likely to force an ugly showdown with Clive Davis, head of BMG’s Arista Records division and one of the record industry’s most respected figures, sources said.

Upon completion of the estimated $100-million deal, BMG chief Strauss Zelnick is expected to name LaFace co-founder Antonio “L.A.” Reid as president of Arista. Davis, who built that booming label from scratch, sees Reid’s elevation as a move to push him out the door, the sources said.

Competitors are comparing the dispute to a 1994 power struggle between Time Warner music chief Robert Morgado and Warner Bros. Records’ Mo Ostin, which began as a demand for a succession plan but evolved into a corporate blood bath that devastated the music group and led to an exodus of dozens of top executives as well as a massive erosion of market share.

The latest battle pits Zelnick, a 42-year-old executive who rose to power in the movie industry and has never run a music label, against Davis, a 66-year-old music icon who has been intimately involved in the success of such stars as Whitney Houston, Patti Smith, Janis Joplin and Santana.

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If Davis quits when his contract expires in June, competitors predict that it would dramatically destabilize Arista, which accounts for about a third of BMG’s market share and is considered the strongest asset in its U.S. repertoire. BMG is a unit of the German conglomerate Bertelsmann.

This is the second time in two months that Zelnick has locked horns with a top label chief at Bertelsmann. Five weeks ago, he went to war with Zomba Group chief Clive Calder, accusing him of luring pop sensation ‘N Sync away from BMG’s RCA division with an improper contract offer. That move is expected to drive Calder, whose label accounts for another third of BMG’s current market share, to exit the corporation when his deal runs out early next year.

Reaction to the drama in music industry circles on Wednesday was overwhelmingly critical of Zelnick. Musicians and executives who have worked with Davis over the years expressed outrage over reports that Davis’ days at Arista may be numbered.

“What is it with these corporations?” said songwriting whiz Diane Warren, who has crafted blockbuster hits for nearly every pop star in the business. “Why would a company drive out the guy who created everything that the label stands for--and at the very moment when he is at his peak? Clive Davis is Arista Records. It just doesn’t compute for me. Are they out of their minds?”

Five years ago, BMG rewarded Davis with an unusually rich $50-million contract for transforming his tiny pop label into a diverse powerhouse that dominated the sales charts with a string of rap, R&B;, light jazz and country hits.

Davis has maintained a phenomenal track record as a hit-maker for decades and BMG has allowed him to run Arista with no interference from anyone inside the corporation.

But Zelnick, who came to BMG nearly 14 years after Davis, has never seen eye to eye with the stubborn music entrepreneur, sources say. Davis essentially tells Zelnick and other corporate superiors that he’ll deliver the financial numbers they want but otherwise runs the label the way he wants, sources say.

Davis, who 10 years ago convinced Reid and his partner Kenny “Babyface” Edmonds to start a joint venture with BMG, also has done nothing to address demands by Zelnick and his bosses that he develop a successor plan at Arista.

The seeds for the battle over Arista’s future were planted about two years ago when Zelnick quietly pitched the presidency of the label to Reid as part of a plan to buy the rest of LaFace, sources say. Zelnick’s boss, Bertelsmann chief Michael Dornemann, signed on to the plan soon after, but Davis resisted the idea and never took it seriously, sources say.

Two weeks ago, Zelnick brought up the topic again during contract negotiations with Davis, but Davis rejected the idea and left the room. Sources say Arista’s employees and artists are furious about Zelnick’s plan and that morale at the company has been devastated.

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Zelnick declined comment, but addressed the issue in a statement released on Wednesday.

“My strong desire is to do right by Clive Davis,” Zelnick said. “I have nothing but the highest regard and deepest respect for Clive and what he has accomplished for Arista and the industry.

“As CEO I have a responsibility to make decisions based on what’s right for the company, and that includes making sure that we have an appropriate succession plan in place at Arista.

“While we generally do not comment on contract negotiations, everyone at BMG--especially me--hopes that Clive will stay on to continue building his legacy and ensuring Arista’s continued success in the decades ahead.”

Davis was traveling in Europe and could not be reached for comment, but sources said that he is unwilling to accept reduced power or pay at the label.

In a statement released Wednesday, Davis said he would not retire and intended to work at Arista until his contract ends in June (when sources say he will receive a large payout based on the label’s performance).

“I will be weighing BMG’s offers to me which involve both preserving my legacy and, ironically, major support of a new public media company that I would be forming,” Davis said. “I am very moved by the overwhelming outpouring of support from my artists, the officers and employees of Arista and those in the industry.”