The five-year-old deal has fallen apart after Disney and WMI, the international division of Warner Music Group, the world’s fourth-largest record company, failed to agree terms for a new agreement that would begin early next year.

The negotiations, which lasted about six months, are understood to have fallen apart after Disney insisted on removing the right to distribute read-along children’s CDs and books. WMI is also thought to have balked at multimillion- dollar advances demanded by Hollywood on new releases, which it would prefer to spend on developing its own artists.

The record company is understood to have been frustrated by difficulties in selling some of the biggest artists because they did not make promotional tours to Europe.

“There was no way WMI could justify doing the deal that was offered by Hollywood,” said one person familiar with the situation.

However, Hollywood is likely to be courted by rival record majors, including EMI and Universal Music Group.

A division of Disney’s Buena Vista Entertainment, 15-year-old Hollywood Records has long been a minor player in the US music industry, and for years lost tens of millions of dollars annually. Disney is thought to have considered closing it several times. But the company has recently began making modest profits on the back of chart successes from a clutch of teen stars.

WMI’s cancellation of the deal reflects the pressure on Warner Music Group to win favour on Wall Street after a poorly received $556 million (£320 million) share sale and initial public offering.

The company has been focusing on cost-cutting and artist development since it was acquired from Time Warner in 2003 for $2.6 billion by Edgar Bronfman Jr and a group of private equity backers.

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