‘N Sync Ruling, Arista Dispute Cast Cloud Over BMG

Bertelsmann Music Group suffered a costly setback Wednesday when a court ruling paved the way for pop sensation ‘N Sync to break its contract with the German conglomerate and release its much-anticipated follow-up album through a competitor.

The move follows a lawsuit filed last month by BMG against ‘N Sync and Zomba Group, accusing the company of luring away the pop group with an improper contract offer. On Wednesday, a federal judge in Orlando, Fla., rejected an attempt by BMG to stop the group from using its own name and to block the release of its next album until after the case goes to trial. (The judge is expected to issue a written ruling on the matter next month.)

Wednesday’s decision is a blow to BMG chief Strauss Zelnick, whose recent back room battles with Zomba chief Clive Calder and Arista head Clive Davis have cast a cloud over BMG that competitors suggest could ultimately erode the market share of one of the world’s major music companies.

Zelnick’s fight with Calder could not only cost BMG millions of dollars in profit from the next recording by ‘N Sync, it may also encourage Zomba to find a new distributor after the firm’s deal with BMG lapses early next year. If Zomba does bail, BMG would instantly lose a third of its 15% share of the U.S. music market--driving BMG from second to last place in music sales.

Zelnick could not be reached Wednesday and Calder declined comment. A representative for Zomba refused to discuss the company’s future distribution plans, but said the label and ‘N Sync “are now moving forward with the completion of the group’s first album for [Zomba],” which is expected to be released within months.

Concerns About Arista Succession

The ‘N Sync defeat intensifies the firestorm around Zelnick, who has also been thrashed recently by artists and executives for the way he has handled contract negotiations with Davis, one of the most respected figures in the music business.

Davis, whose contract expires in June, stormed out of a meeting several weeks ago after Zelnick informed him that BMG planned to install Antonio “L.A.” Reid as president of Arista Records. Davis, a notoriously stubborn entrepreneur, launched BMG’s Arista label 25 years ago and has run it autonomously with great success, resisting pressure from the corporation to come up with a succession plan.

At 66, Davis remains one of the industry’s most hands-on label chiefs, often selecting songs for his artists and producing recordings. Five years ago, BMG rewarded Davis with an unusually rich $50-million contract for transforming his label into a diverse powerhouse that dominated the sales charts with a string of pop, rap, R&B;, light jazz and country hits.

Zelnick, concerned about the future of the label upon Davis’ eventual departure, decided about two years ago to begin grooming Reid, co-founder of its LaFace label, to become president of Arista, sources said. Zelnick’s boss, Bertelsmann chief Michael Dornemann, signed on to the plan soon after and approved Reid’s enrollment in a six-week executive course at Harvard Business School, which he completed last year.

Davis could not be reached for comment, but sources close to the executive say he wasn’t notified about the plan to elevate Reid until earlier this month during contract talks with Zelnick and Dornemann. Davis perceived the plan as a move to reduce his power at the label and ultimately push him out the door, sources said.

The plan drew criticism this week from such pop stars as Whitney Houston, Kenny G, Carly Simon and Barry Manilow, who issued statements and telephoned reporters voicing outrage over the prospect of Davis’ ouster.

“Over the last few days I’ve sat on the sidelines and watched the mean-spirited, disrespectful actions [toward] my friend and colleague, Clive Davis,” Manilow said. “The blatant attempt to remove Clive from his position at Arista Records is offensive and alarming.”

‘This Label Will Crumble’

In an interview, Simon said she turned down offers to record elsewhere this year and re-signed her contract with Arista just two months ago because she loves working with Davis.

“I can’t imagine Arista Records without Clive Davis. That’s like New York state without Manhattan,” said Simon, who has recorded for Arista since 1984. “Arista isn’t like other labels where you wonder who’s going to be in power the next year. There wasn’t a doubt in my mind when I signed my deal that Clive would be in charge at Arista. He is the reason I decided to renew my deal. I can’t tell you what a shock this is to me.”

Arista executives who recently signed or renewed contracts to work at the label were stunned too.

“If Clive’s not here, I don’t want to be here,” said Richard Palmese, a top Arista executive. “I moved from California to New York specifically to work with Clive. This label will crumble if Clive leaves.”

Several Arista executives have consulted lawyers about whether BMG fraudulently induced them to sign their contracts knowing that the corporation intended to replace Davis when his contract expired in June. None of those Arista executives would speak publicly, but several privately said they felt betrayed by BMG and planned to pursue legal options to break their contracts should Davis leave.

BMG did not return calls, but sources inside the company said BMG brass hope to diffuse the confrontation next week during a series of meetings with Davis. Although few company sources believe that BMG will reverse itself on its proposal for a succession plan, Dornemann called Davis and scheduled a meeting with him for Monday morning.

Thomas Middelhoff, chairman and chief executive of Bertelsmann, which owns BMG, told The Times this week that he wants Davis to stay and hopes to resolve the matter soon. Sources say Davis is scheduled to meet with Middelhoff on Wednesday in BMG’s New York headquarters.

So far this year, Arista has accounted for about a third of BMG’s market share and was expected to generate about $100 million in profit--or nearly half of the German conglomerate’s worldwide music profit, sources said.