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New BMG chief trying to discipline record company

Like many other successful music executives, Richard Griffiths used to operate pretty much as he pleased. Credited with helping to build recording company BMG's U.K. operations into a powerhouse, Griffiths would raise eyebrows by putting his feet up on the conference table during meetings. He didn't seem to notice that his colleagues were irked.

Things changed shortly after the arrival two years ago of Rolf Schmidt-Holtz as chairman of BMG, a unit of Germany's conservative media giant Bertelsmann AG. When Griffiths put his feet up at a high-level meeting, Schmidt-Holtz produced a clean white towel and placed it under Griffiths' feet. It wasn't long before he fired Griffiths.

At a time when the music industry is reeling from declining sales due largely to digital piracy, a new generation of business-minded managers is arriving to shake things up. Schmidt-Holtz was a former magazine executive unknown in the music business when he was elevated from inside Bertelsmann to the BMG job in early 2001. He says many music-industry veterans have been guilty of hubris and wastefulness, even at his own shop.

"We have proven within BMG how you can destroy with arrogance hundreds of millions of dollars," he said. BMG lost about $400 million in 2001, about half of it from operations and about half from write-offs of items such as Internet investments.

In an effort to return BMG to the black, Schmidt-Holtz cut 1,500 jobs, or about 20 percent of the company's work force, and sharply reduced such perks as the fresh flowers on every floor of BMG's New York headquarters and the newspaper subscriptions and evening limousine service for employees.

More importantly, he said, he is trying to change the culture, insisting that BMG's labels can't miss release targets because artists are late finishing their albums — an excuse music companies frequently give for missing their quarterly earnings. Under Schmidt-Holtz, BMG has written clauses into some major artists' contracts imposing financial penalties if albums are late.

The 54-year-old executive says he won't permit BMG to take big risks by signing artists to huge contracts. He pressed Arista Records not to sign Mariah Carey in 2001; she subsequently signed a huge contract with EMI Group PLC. That deal proved disastrous for the U.K. company and led to a huge write-off; it also is seen as having played a role in the replacement of EMI's top recorded-music executive.

"Years ago, we might have said, 'Let's sign Mariah, let's be hot,' " said Mr. Schmidt-Holtz in a recent interview. But times have changed, he said. "I don't put my company at risk for one contract . . . We can't do business as we did two years ago, five years ago, 10 years ago."

The biggest question looming over Schmidt-Holtz's work is the future of BMG. Bertelsmann tried to merge BMG with EMI a couple of years ago and recently had brief talks about another deal. Schmidt-Holtz insists BMG isn't for sale but he doesn't rule out that Bertelsmann would pursue a merger.

So far, Schmidt-Holtz appears to be getting results. When Bertelsmann reports its 2002 results next week, BMG is expected to show an operating profit of about $125 million. All the albums scheduled for release last year were delivered, said Michael Smellie, BMG's chief operating officer. Among the hits was teen singer Avril Lavigne, whose debut album so far has sold 12 million copies around the world.

Not all of Schmidt-Holtz's efforts have gone smoothly. He's had to replace all four of the senior executive appointments he made when he took over as chairman. One of the managers, Thomas Stein, was transferred to two different jobs before being moved back to his original post, overseeing BMG's operations in Germany, Switzerland and Austria.

Schmidt-Holtz acknowledges having made mistakes but says the important thing is that he corrected them.

Whether BMG can keep up last year's momentum is open to question. BMG's share of the U.S. market for recently released albums has dropped sharply in the past 12 months, although it is still higher than it was at this time two years ago. Profit in 2002 got a special boost from an album commemorating the 25th anniversary of Elvis Presley's death.

Schmidt-Holtz acknowledges if the industrywide decline in sales continues, it will be difficult to repeat those numbers. But he says he is optimistic about the company's release schedule for 2003. He recently turned down an approach to run Bertelsmann's broadcasting arm, RTL, so he could stay at BMG.

It isn't clear whether Schmidt-Holtz's effort to impose more business discipline on the freewheeling record business can work long term. For example, the effort to prevent album release dates from slipping is unrealistic, some music veterans say.

"Artists are not machines. You can't program them to deliver an album on a certain day," said Griffiths, who has started his own company.

Schmidt-Holtz insists he doesn't want his label heads to be the ones counting the pennies. He wants them to have strong lieutenants watching the operations' financial side.

Charles Goldstuck, RCA's chief operating officer, said labels need to come up with new ways to make up for the lost business when album delays inevitably occur. At Arista, Reid wasn't available to comment, but Schmidt-Holtz said the executive is being more cost-conscious lately.

BMG put pressure on its labels to ensure that albums, including Santana's album that Davis co-produced, were delivered in 2002, rather than slipping into 2003.

The album was pushed back to October 2002 from its original release date early in the year.