Strauss Zelnick

Brandweek, July 3, 2000 by Michael Schrage

The real threat to music companies isn't piracy, it's ignoring the technologies that make it possible.

The cynical might describe Bertelsmann Music Group CEO Strauss Zelnick's glittering resume as a chronology of relentlessly upward opportunism. The more upbeat interpretation would cast him as the profitable embodiment of digital convergence. His wunderkind career has been an unusually broad blend of managing operations, exploiting technologies and building brand. Thanks to the Internet, Zelnick has an even more intense blend of opportunities and threats to manage. Before being recruited in 1994 to run Bertelsmann's Music Group--whose labels include Arista and RCA with talent ranging from Annie Lennox to Sean "Puffy" Combs to The Backstreet Boys--Zelnick had run Crystal Dynamics, a video game company that he successfully sold to Time Warner, and had also been president and COO of 20th Century Fox. Prior to that, he had been president/COO of Vestron--a one-time leader in the home video business--and Columbia Pictures' vice president of international television. Zelnick is not yet 44.

In fact, Zelnick's versatility, flexibility and discipline as a multimedia executive gives him a perspective on the business of new media innovation that seems refreshingly contrarian for a suit: Yes, the Internet is a revolutionary medium; but no, it will neither annihilate nor eradicate existing media industries. Business will still be business, whether the dominant medium is atoms, bits or some unanticipated hybrid. Napster is not an inherently evil innovation and the record industry would be wise to pay attention to how its best customers want to use new technology to acquire new music.

While these are hardly heretical notions, Zelnick's pragmatism lends them a heft that the shrill prognostications of Net visionaries simply lack. Zelnick runs a global $4.6 billion business that he acknowledges is being redefined by digital technologies. However, he dismisses the notion that the MP3.coms and Napsters of the world can't be co-opted, competed or collaborated with in ways that leave companies like BMG in even more profitable shape than before. A smooth, self-aware communicator, there is nothing of the knee-jerk, shoot-from-the-lip media mogul machismo in Zelnick's style. He understands business and he has no illusions--fanciful or fatalist--about what technology will mean to music in the coming years. Indeed, he sees what's going on in the music industry as a precursor to what will happen to all creative content businesses this decade.

When did you understand that new Internet technologies would affect what it means to be a label?

I worked in Silicon Valley for a couple of years, so I arrived at BMG with a certain amount of religion about the Internet and the importance it would have for our business. Kevin Conroy--who's our chief marketing officer--and I started talking about what BMG would do in the Internet almost five years ago. That was well in advance of the MP3 format, well in advance of MP3.com, well in advance of Napster.

How concerned are you with piracy Issues?

People have spent too much time focusing on piracy and not enough on the fact that piracy is a normal part of new entertainment businesses. While I don't in any way mean to be cavalier about people stealing things--not the least our copyrights--I do think piracy is controllable through four means: strong legislation, which we have worldwide; enforcement, which we're getting better at; encryption, not because encryption can stop professional piracy but because it can dissuade casual piracy; and, most importantly, the creation of legitimate alternatives. In the absence of a legitimate alternative, people will do what they have to do to get a hold of your music.

Will there be a consensus in regards to how the record industry will respond to the Napsters and the MP3s of the world?

In the early days of new formats there are always disagreements about how stuff is going to be developed. In the case of video, for example, there was beta versus VHS. We're willing to work with a number of different people, and we are working with a number of different technologies. However, will both a standardized format and a standardized way of doing business emerge? Absolutely. It always does. We don't have much of a stake in what that is. We do have a stake in standardization, though, because consumers never really show meaningful adoption of new technology and media until it's standardized.

Are you concerned that there may not be a standard business model?

People don't adopt best practices immediately, but they do over time. With minor modifications, businesses always settle down to a basic way of doing business. I do think we are going to have a number of opportunities to make money that didn't exist previously. For example, content syndication, where previously we made promotional material and convinced other people to use it, or maybe even paid them to use it. Now people want our content and they're paying us to use it. In that way I suppose you could argue it's a new business model, but eventually everyone will do it the same way. Are there little changes around the edges? Yes. Just enough to keep lawyers in business, but the basic model stays the same.