Clive Davis' swan song

(Fortune) -- Until this week, the rules of the music industry didn't apply to Clive Davis. At 76, Davis held the top job at SonyBMG's BMG Music Group, playing Svengali to teen idols like Kelly Clarkson and Alicia Keys. The legendary record man acted as if he'd be in charge forever, thanks to his uncanny ear for a gold record, to say nothing of his genius for self-promotion and his corporate survival skills.

On Thursday, however, SonyBMG removed Davis from his post. He will now hold the amorphous title of "chief creative officer" at the company, and while still working with a handful of acts. But the BMG Music Group will now be overseen by Barry Weiss, CEO of SonyBMG's Zomba label, who is younger -- and presumably less expensive than his predecessor.

Why did Davis and two of his longtime deputies Charles Goldstuck and Tim Bowen have to step aside? No matter how hard they try, SonyBMG and its major label peers -- Warner Music Group (WMG), Universal Music Group and EMI -- haven't been able to fix the structural problems afflicting their business. CD sales continue to decline. Meanwhile, record companies can't move enough digital music to make up the difference.

All they know is they can't cling to the old ways. With the passing of Atlantic Records founder Ahmet Ertegun, nobody embodies the past more than Davis. His career stretches back to the sixties, when as president of Columbia Records, Davis signed acts like Janis Joplin and convinced jazz great Miles Davis to plug in and start the fusion era.

But the music industry has changed dramatically. Davis has a reputation for spending heavily on traditional marketing to sell records. Now labels can break acts much more cheaply on the Internet. A lawyer by training, Davis also negotiated famously rich contracts for himself as so many old-school record guys used to do. As long as Davis held one of the top spots at SonyBMG, it was hard for his employer to say convincingly that it was trying to reduce costs and adapt to the new industry's harsh new realities.

Part of the reason for Davis' longevity was his Rasputin-like ability to claw his way back from the abyss. Fired form Columbia in the seventies, he founded Arista Records. There, he turned Barry Manilow and Whitney Houston into stars. This was Davis's first comeback.

The second came after he sold Arista to Bertelsmann. The German media company ended up showing Davis the door in 2000. But the legendary record man enlisted the support of friends like Houston and Carlos Santana. They kicked up such a ruckus that his former German bosses put up half the money for Davis' next venture, J Records. In 2002, Bertelsmann reversed itself. It bought J Records and welcomed Davis back as the new head of the RCA Music Group, now part of SonyBMG, a joint venture run by Sony and the German media group.

Davis became almost as much of a celebrity as his acts. He hosted a glitzy Grammy Award party every year where he unveiled his latest musical discovery. He was famously took credit in interviews for his successes -- and sometimes those of others. The joke among his industry peers is that the former BMG Music Group chief thinks the CD was named in his honor. None of this would matter a wit if Davis couldn't pick a top 40 hit.

Even at 76, he still has his touch. His protégé Alicia Keys' latest album has sold 3.4 million, according to Nielsen SoundScan. That's wondrous given that some of the industry's biggest names are struggling to convince fans to buy their records instead of downloading them illegally. Surely, SonyBMG would like to have more old-school stars like Keys. There aren't many left. But apparently, the company doesn't feel it can afford star executives anymore.