BMG Entertainment's top two executives - chairman Michael Dornemann and president and CEO Strauss Zelnick - are leaving their posts as part of a wide-ranging reorganisation of parent company Bertelsmann.

In a statement, Bertelsmann said that Dornemann will step down from the company's board on December 31 and will quit the chairmanship of BMG Entertainment at the end of the current financial year on July 31. "By taking this step, Dornemann will facilitate the restructuring of Bertelsmann's television, music and new media division and allow for a swift transition," the statement said.

Bertelsmann is restructuring into three business areas: Content, Media Services and Direct-to-Consumer. The content division includes broadcasting giant RTL Group, major music label BMG and publishing entities Random House, Gruner+Jahr and Bertelsmann Springer. Media Services encompasses printing, services and IT while Direct-to-Consumer includes book and music clubs and the company's e-commerce activities.

Dornemann and Zelnick were understood to be unhappy that internet operations, including a controversial alliance with music industry scourge Napster, will no longer fall under the aegis of BMG Entertainment, but instead will be overseen by e-commerce chief Andreas Schmidt.

Bertelsmann, which has been one of the more forward-looking major record companies in the online entertainment arena, broke ranks with the other four major labels to offer an olive branch to file-sharing company Napster last week. Under the new alliance, sealed by Bertelsmann CEO Thomas Middelhoff, the company agreed to drop its copyright infringement suit if Napster introduces a membership-based service that pays royalties. Bertelsmann has also agreed to loan Napster $50m to finance the service and is expected to take a stake in the company prior to an IPO. It remains unclear whether Dornemann and Zelnick endorsed the Napster deal.

Bertelsmann's on-line music activities also include e-commerce ventures CDnow and GetMusic, the latter a joint venture with Universal Music Group, and alliances with download sites such as and ARTISTdirect.

Rumours of Dornemann's exit have been circulating since May when his mentor and supervisory board chairman Mark Woessner resigned. Zelnick is understood to have been offered Dornemann's position as BMG Entertainment chairman, along with a seat on the Bertelsmann board, but stripped of some of his responsibilities, still decided to leave.

Former BMG International chief Rudi Gassner is plugging the gap at the top of BMG Entertainment taking up the post of chairman and chief executive based in New York. Aged 57 and three years away from retirement, his appointment is seen as a temporary measure. Ironically Zelnick fired Gassner from BMG International earlier this year.

Dornemann has been with Bertelsmann for 18 years and along with Woessner is credited with orchestrating the acquisition of book publisher Doubleday and record label RCA. In 1987 he combined RCA with Bertelsmann's existing music activities which he has since headed from New York. In 1995, Dornemann oversaw the merger of Bertelsmann's TV division Ufa with CLT which has since been merged with the UK's Pearson Television to form RTL Group.

Zelnick joined BMG in January 1995 as president and CEO of the company's North American arm and became president and CEO of BMG Entertainment in July 1998. He was formerly president and CEO of 20th Century Fox.

Meanwhile, Middelhoff has also expressed interest in merging BMG with UK music major EMI according to the UK's Sunday Business newspaper. Time Warner recently sacrificed its planned acquisition of EMI in order to gain European Commission approval of a larger merger with AOL. A combined Bertelsmann/EMI would have 25% of the global music market compared to 27% for a combined EMI/Warner Music, Sunday Business said.