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Just days after German media giant Bertelsmann formed an alliance with Napster, BMG Entertainment’s two top executives have announced that they’re leaving. The resignations, which were announced over the weekend, reflect a power shift within Bertelsmann from New York, where the BMG record label is based, to Hamburg, Germany, where its e-commerce operations are headquartered. The BMG Entertainment execs, Chairman Michael Dornemann and President and CEO Strauss Zelnick, saw their responsibilities diminish as Bertelsmann decided to transfer all of the record label’s “direct-to-consumer” activities to the e-commerce division, which also oversees CDnow.com , Barnesandnoble.com and BOL.com. In a statement, Bertelsmann said BMG would focus on its strengths — the generation of content and talent — while the e-commerce group would take over BMG Music Service, which is currently transferring its operations to the Internet. Bertelsmann CEO Thomas Middelhoff said the timing of the Napster deal and the BMG resignations was coincidental. However, Zelnick had been an outspoken critic of Napster as late as July, when at a conference in Los Angeles, he compared Napster users to thieves. “If you walk out of a store with my CD under your arm, we’re going to throw you in jail,” he said. One of the striking elements of the Napster deal was that, while it may result in the release of Bertelsmann’s vast collection of music copyrights to the 38 million members of the Napster community, the deal was negotiated by Andreas Schmidt, 39, CEO of Bertelsmann’s e-commerce group, BeCG. When asked how the deal would affect the label’s music publishing arm — the fourth-largest in the world — a spokesperson said, “That deal was made through the e-commerce group separately. It didn’t involve the label or the copyright group. We are still trying to figure out how it affects us.” As late as October, with negotiations between Bertelsmann and Napster well under way, a high-level BMG executive engaged in a public pissing match with Napster CEO Hank Barry. When Barry complained publicly, after a court hearing, that all his overtures to the major labels had been rebuffed, BMG President of New Technology Kevin Conroy issued a press release disputing Barry’s claim. “BMG has in fact discussed various business models with Napster,” Conroy said. “But Napster has never addressed the important issue of licensing nor proposed anything approaching a sound, legitimate business model.” When the Napster deal was announced, Conroy issued a statement saying “peer-to-peer file sharing is one of the many new digital commerce models that BMG has been actively exploring for some time,” but he refused repeated e-mail and phone requests to elaborate. But the disjunction between Bertelsmann’s leadership and that of BMG Entertainment became clearer in October, when BMG rolled out an extremely un-Napsterlike and widely criticized download trial. That trial offered downloads of singles by popular artists such as Whitney Houston, Christina Aguilera and Carlos Santana for $1.95 to $3.95 apiece and whole albums for $9.95 to $14.95 — almost the price of a tangible CD. Moreover, BMG was out in the cold when Warner, Sony and Universal announced the development of subscription-based services intended to tap into some of the Napster magic. Nick R. Henry-Stolz, a recording industry analyst at JP Morgan, isn’t surprised that the Napster initiative within Bertelsmann didn’t come from the record business. “This step was easier taken from outside the music business, because people coming from the music business have preconceived notions of how things should be run,” Henry-Stolz says. Dornemann, 55, is expected to leave by the middle of next year; Zelnick, 43, said his resignation would be effective at the end of this year. Zelnick’s replacement will be Rudi Gassner, 57, a former Bertelsmann executive who spent 18 years at PolyGram. Related Articles from The Industry Standard Let the Music Play Sleeping With the Enemy Morgan Stanley Likes Bertelsmann-Napster Deal Copyright � 2000 The Industry Standard

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