Barry Diller Still Believes

Baldwin Louie — Mon, 30 Jul 2001 15:00:00 -0700

Maybe spending more than two decades under the klieg lights had finally fried his mind, whispered observers of Barry Diller in 1992.

While still at the apogee of media adoration - Diller was arguably the first true celebrity mogul, the toast of the Vanity Fair sensibility - he made a career swerve that left the intelligentsia puzzled and disappointed.

He resigned as chairman and CEO of News Corp.'s Fox unit in February 1992, reportedly chafing under owner Rupert Murdoch's meddling, then took 12 months off. When he reemerged, he announced that he would become chairman and part owner of the QVC Network, a home-shopping cable channel known primarily for hawking cubic zirconium. Leaving QVC two years later to run (and later buy) the underdog Home Shopping Network seemed only to further erode his image - and to fuel the zirconium jokes. "People passing Diller at his regular table in the Grill Room of the Four Seasons had almost embarrassed expressions as he kept looking around, as if for applause," the New Yorker's Ken Auletta wrote in a 1993 profile documenting the weeks after the QVC news. "They seemed to be thinking: Barry's going to run what? ... You've got to be kidding!" But Auletta himself had described Diller's sabbatical as a period of deep study of the potential of digital technology, so there were those who wondered if it was all part of some grand, visionary plan.

The mystique was further diminished by a series of unsuccessful acquisition attempts: Paramount in 1993, CBS in 1994, NBC in 1998 and Lycos in 1999. Despite these disappointments Diller patiently assembled his new company, exploiting not the public's unquenchable lust for Hollywood glitz but the more prosaic impulse-buying habits of couch potatoes across the nation. He began stitching together a patchwork of acquisitions - a small production studio here, a slice of an Internet company there. He bundled the acquisitions under the general rubric of USA Networks, a loose collection of assets that came to include everything from a movie production studio to an online ticket-selling business.

But last week Diller was back in the spotlight, bringing his plans for USA Networks into sharper focus and wowing Wall Street. All these years, as talk of set-top boxes and interactive TV droned on without results, Diller has been building a business at the juncture of TV and e-commerce.

USA Networks intends to purchase a controlling stake in online travel site Expedia, striking an agreement with Microsoft to take over its 33.7 million shares, a 70 percent claim in the venture, in a complicated transaction worth up to $1.5 billion.

Travel is the No. 1 online retail category, with sales expected to reach $24 billion this year. (No. 2, PC sales, lags far behind at $7.1 billion.) But Diller has more in mind than just selling Caribbean vacations. The deal may well be a pivotal moment in USA's evolution, with Microsoft potentially playing a larger role with its 3 percent to 5 percent stake in USA Networks, should the deal close. And Vivendi Universal - a 43 percent owner of USA Networks - could turn to Diller and company to open a new front for its global expansion plans. Vivendi and USA Networks quietly struck a deal last week to give Vivendi the option to raise its stake in USA to 50.1 percent. (It would not get voting control.)

Diller hinted at a broad range of ties between his company's media and commerce units and Microsoft's ambitious Internet and software businesses. "One of the aspects of [the Expedia deal] that's most important is this relationship we have with Microsoft," Diller says. Indeed, Microsoft stands to profit handsomely from the deal. Although it sold Expedia at a discount, the software giant could make canny use of USA's database of 30 million consumers to help build HailStorm, the Web services initiative that's key to Microsoft's future.

Up again, down again; it's just the nature of the game.

Tech stocks sold off lightly in morning trading, as Microsoft's lowered guidance stirred up concerns. Notable exceptions were Sun Microsystems and eBay, both of which posted mild gains after their own earnings calls Thursday.

On Thursday, decent news from IBM, Nokia and Dell had buyers upping techs. But fickleness returned on Friday, as traders retreated a bit.

As of 11 a.m. EDT, the Nasdaq composite had dipped 15.64, or 0.76 percent, to 2030.95. The Dow Jones Industrial Average lost 29.27, or 0.28 percent, to 10580.73, weighed down mostly by Microsoft and Intel. The Standard & Poor's 500 lost 1.58, or 0.13 percent, to 1213.44. The Industry Standard 100 fell 1.59, or 0.45 percent, to 355.08.

Microsoft lost $4.23, or 5.83 percent, to $68.34. The company delivered better-than-expected revenue numbers and took its $3.9 billion one-time charge in stride. But what had traders selling off the stock on Friday was the firm's outlook for the September quarter – lowered guidance on what Microsoft's CFO called "slower PC growth rates than any of you have modeled."

PC-makers Dell and Compaq both fell roughly 2.85 percent on the words. Gateway lost $2.41, or 16.52 percent, to $12.18 after reporting a second-quarter loss and slashing full-year estimates.

Chipmakers Intel, Advanced Micro Devices and Micron all fell on the Microsoft outlook.

Countering the trend, network computing leader Sun Microsystems gained 93 cents, or 6.44 percent, to $15.37. The company, whose Java programming language supposedly will not be supported in the upcoming Windows XP, beat lowered estimates for the quarter but was fairly reticent about guidance.

Shares of eBay went up $2.35, or 3.65 percent, to $66.75. The online trading play and current darling of Internet investors beat analysts' estimates and raised its forecasts for the year, saying that new products and international expansion will fuel revenue growth. Amazon and Yahoo both followed in eBay's footsteps, rising 2 percent and 3 percent, respectively.

Telecom equipment investors were split between selling equipment maker Nortel, which followed through on reporting a steep loss, and buying wireless infrastructure and mobile-handset maker Ericsson, which met second-quarter estimates as sales came in ahead.

Nortel lost 1.9 percent to $7.60. Lucent gained 6 percent to $7.66 on the news, as Alcatel fell 4.8 percent to $16.05.

Ericsson gained 1.3 percent to $4.77 as both Nokia, which surged on Thursday, dropped 1.4 percent and Motorola lost just 0.68 percent.

Networking chip player PMC-Sierra fell $2.56, or 8.18 percent, to $28.75. The company posted a second-quarter loss in line with expectations but showed a further drop-off in sales. Vitesse and Xilinx fell 3.2 percent and 4.3 percent, respectively, on their own reports. Applied Micro Circuits lost 5 percent to $16.01.

Contract manufacturer Flextronics was flat at $24.92, despite coming in a penny below estimates for the quarter. Cisco, one of Flextronics' primary customers, gained 22 cents, or 1.24 percent, to $17.98.

B-to-b play Commerce One lost $1.01, or 20.65 percent, to $3.88, after reporting a wider-than-expected loss. Cable equipment supplier Scientific Atlanta lost $13.38, or 38.14 percent, to $21.70 on a raft of downgrades in response to lower revenue in the past quarter.

On the flipside, Network Associates, which makes security software, gained $2.43, or 21.52 percent, to $13.72 after beating estimates.

The deal may be the best example yet of the convergence of entertainment and shopping that has long bewitched global media companies. USA Travel, as the new venture will be called, will combine Expedia with a 24-hour cable channel and the National Leisure Group, a new acquisition that provides private-label vacation packages. USA Travel will rely on Home Shopping Network's sales and production muscle; customer service and fulfillment will be handled by other units of USA's empire.

In Diller's world, customers will book airline tickets using Expedia, find lodgings with the Hotel Reservations Network, peruse restaurant choices on CitySearch and buy their concert and sporting events tickets through Ticketmaster.

This is not, of course, the ultimate convergence that media visionaries have in mind. TV viewers won't be able to click a button, flip over to a Web site and buy everything from a blouse to a boat. Diller isn't waiting for that day to arrive. Instead, he's using today's technology - old-fashioned cable TV, call centers, and dialup Internet connections - to cobble together a more-practical convergence. "It's just coming into view for other people to understand," Diller says. "People aren't as likely now to say that these are unrelated assets."

Investors are already buying in. Even as media and Internet companies struggle with the worst advertising market in a decade, USA Networks has sailed along, buoyed by the 65 percent of revenues that come from direct sales. (Another 20 percent flows from subscriptions and production fees.) Accordingly, USA's share price has jumped nearly 50 percent since January, climbing from $18 to $26.96 last Thursday. Since 1996, the company's revenues have risen from $41 million to nearly $5 billion, and its market cap has exploded from $235 million to just under $19 billion today. USA Networks reports earnings this week, and analysts expect it to lose 13 cents a share on revenues of $1.3 billion. "Considering how crappy the market has been this year, it's clearly done extraordinarily," says Bear Stearns analyst Victor Miller. "It's my No. 1 pick." Miller's not the only one cheering. "Barry Diller rocks," says Credit Suisse First Boston analyst Laura Martin. "And you can quote me on that, baby."

The latest growth spurt came after a much-needed housecleaning in June 2000. In that restructuring, Diller organized USA into three divisions: entertainment, which encompasses the cable channels and film production; electronic retail, consisting of HSN and its international offshoots; and information and services, combining everything from Ticketmaster and the Hotel Reservations Network to call center powerhouse Precision Response Corp. and back-end technology infrastructure unit Electronic Commerce Services.

ECS is the "glue that ties together these disparate assets," Diller says. With ECS in place, for example, HSN was able to land deals with major sports leagues including the PGA, NBA, NFL, Nascar and, last week, the U.S. Tennis Association to sell sports merchandise during game broadcasts.

The deals with the sports franchises are known inside USA Networks as "short shopping," a strategy that the company has vowed to duplicate with media companies hungry for additional revenues in the depressed advertising climate. Diller says one major broadcast network has already tapped USA to help it sell its licensed schwag on the air and online. (He declined to name the network.)

Diller became a convergence convert in July 1992. As the story goes, he and his longtime friend (now wife) fashion designer Diane von Furstenberg were visiting the studios of QVC in sleepy West Chester, Pa. Von Furstenberg was considering launching a line of moderately priced clothing on the up-and-coming cable channel and wanted Diller's advice. But what fascinated Diller was a set of monitors that tracked phone-order volume. He watched in awe as the phones lit up to the rhythms of the on-camera sales pitch. "It was like waves coming onto shore," he says. "I looked at that and I said, 'Oh my God. I don't know what's going to happen, but this is going to be the beginning of things changing.'" In other words, eureka.

If broadcast media is a business built on a fuzzy faith in Nielsen and a nation of demographically sliced couch potatoes, then home shopping cable was a scientific revolution in selling. QVC could know - precisely and instantly - what appealed to customers and how much they were buying. Diller became convinced that the future of media lay in interactivity - an epiphany, it should be noted, that came a good four years before the Net broke through as an engine of commerce. Within six months, Diller became the chairman and CEO of QVC, invested $25 million for a 12 percent stake and began putting a new shine on the shopping channel by going after higher-end customers.

It wasn't long before he set his sights on bigger game. In early 1994 he tried to acquire CBS. (Only Diller knows whether this was a next step in his grand convergence strategy or simply a bid to grab a network for himself.) The QVC board opposed the idea, though, and by December 1994 Diller left the company. But he was by no means through with home shopping. Within eight months, he emerged as the CEO and chairman of QVC's nearest competitor, the Home Shopping Network, based in St. Petersburg, Fla. That's when Diller's strategy began to come into focus. He revamped HSN's strategy, improving production values and maintaining rigorous quality control. To improve efficiency and expand the direct-selling enterprise, USA acquired customer services company Precision Response Corp. in April 2000 and online apparel retailer and technology firm Styleclick in July the same year.

But it was the deal with Universal in 1998 that positioned Diller for the big time. In exchange for a 43 percent stake in his company, Diller took control of a collection of Universal's domestic TV stations and cable networks. It was an anticlimactic follow-up to the 1994 bid for CBS, but the strategic underpinnings were the same: convergence.

There were, of course, plenty of stumbles along the way. Diller dabbled in a string of forgettable Internet ventures, from the grossly underdeveloped Internet Shopping Network to the failed FirstJewelry.com. Then there was the doomed December 1998 spinoff of Ticketmaster Online-CitySearch from USA-owned Ticketmaster - an attempt to cash in on the market's thirst for Internet stock plays. The stock enjoyed an initial run-up, but by November 2000 it was trading below its initial offering of $11.62, a victim of a bloated budget and the market's disavowal of all things dot-com. The spinoff was folded back into Ticketmaster by January 2001.

More famously, Diller tried but failed to acquire Lycos in 1999. He had hoped to use the Internet portal as a gateway to all his properties, enabling him not only to distribute media but also to compete with the likes of Amazon.com for online retail dollars. But the $18 billion bid was eventually defeated by CMGI chief and Lycos investor David Wetherell, who bristled at Diller's lowball offer.

All along, USA has suffered growing pains as it sought to merge acquisitions into the company. Diller concedes that there was some "tissue rejection" with the purchase of CitySearch and Ticketmaster, for instance. "I would say we expected it," he says. But "the recent acquisitions we've integrated fairly well. We've proven that we've gotten fairly good at this."

That's not to say that Diller has figured out how to make all the far-flung units of his ungainly company work together. Forging connections between ad-driven entertainment and commerce-driven offerings - say, the Sci-Fi Channel and HSN - remains, according to Diller, an unmet goal.

But he and his executives are trying to unite what he calls the company's "two hearts." One example: This fall the USA Network will air a documentary on Jackie Onassis and, for the first time, accompany a program with infomercial-like sales pitches. Viewers will be able to buy replicas of Onassis' triple-strand pearl necklace and JFK's wedding bracelet gift of pearls, platinum and crystals, says USA Cable President Stephen Chao. To do that, his team will need to work closely with HSN for the first time.

Besides the logistical challenges, Chao says, the program will test whether viewers expecting a full-fledged show will keep watching when it starts to resemble the Home Shopping Network. "The grand test is ... [whether] one can really play in selling ... and make entertainment that is uncompromised," Chao says. "That's the point of the Jackie O show."

While Chao works that out, Diller is thinking bigger: He wants to get in the ring with media giants like AOL Time Warner, Bertelsmann and Viacom. The Expedia transaction gives USA a powerful partner in Microsoft, a fierce AOL Time Warner rival that now has a vested interest in Diller's venture. USA's minority shareholder, Vivendi Universal, is also quietly plotting its global media strategy by taking a larger interest in the U.S. market. Vivendi is sorely lacking in U.S. TV assets and may seek to leverage Diller's media prowess when the time comes. Diller, however, denies that he will play a larger role in Vivendi's North American media ambitions.

THE URGE TO CONVERGE

How Diller rose from the mail room to moguldom.

1959 Diller, 19, finds work as a mail room clerk at the William Morris Agency with the help of a neighbor, comedian Danny Thomas.

1964 to 1974 Diller climbs Hollywood's ranks, starting as a William Morris agent, moving to ABC as a programmer and on to Paramount, where he becomes chairman and CEO.

1974 to September 1984 As Paramount's top dog, Diller scores with films including Raiders of the Lost Ark and TV series such as Cheers and Taxi. His second in command is Michael Eisner, now chairman and CEO of Walt Disney Co.

October 1984 to April 1992 As chairman and CEO of Fox, which became a unit of Rupert Murdoch's News Corp. in 1985, Diller builds a network that comes to rival ABC, CBS and NBC. At his resignation he says, "I want to own my own store."

January 1993 to February 1995 As chairman and CEO of QVC, Diller fails to acquire Home Shopping Network, Paramount or CBS. QVC's biggest shareholder, Comcast, takes control and he departs.

August 1995 to December 1996 Diller begins building his media empire, starting with a stake in Silver King Communications, which owns 39 television stations. He then merges Silver King with Home Shopping Network, which includes Internet Shopping Network, and becomes chairman and CEO of the new company, HSN Inc.

1997 to 1998 Diller goes shopping. HSN acquires Ticketmaster, then buys the USA and Sci-Fi channels, christening the new firm USA Networks. Meanwhile, Ticketmaster buys the CitySearch guides.

1999 to 2000 USA Networks fails to merge with Lycos, but it acquires the Hotel Reservations Network and Microsoft's Sidewalk city guides. It also establishes USA Electronic Commerce Solutions.

2000 More steps toward convergence: Diller buys customer service company Precision Response Corp. and a controlling stake in Web retailer Styleclick.

2001 USA Networks takes a 75 percent stake in Expedia.

Sources: USA Networks, published reports, The Standard

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Barry Diller Still Believes