Continuing Education: Barry Diller Redefines 'Convergence'

February 15, 1999

Continuing Education: Barry Diller Redefines 'Convergence'

By SAUL HANSELL and GERALDINE FABRIKANT

or much of the last three decades, to ask the question "What is the hottest fad in the media business?" is to invite the responding query, "What is Barry Diller up to now?"

Suzanne DeChillo/The New York Times
Barry Diller, an executive with a knack for finding the hottest media fad, on a terrace overlooking Central Park. Diller's latest move is to combine Lycos, a portal to the World Wide Web, with the electronic shopping holdings of his current company, USA Networks.
From his start as an ABC programmer, brainstorming movies-of-the-week in network television's heyday in the early 1970s, Diller found ways to surf the trends of the moment. After subsequently running Paramount Pictures, he spent most of the 1980s building Rupert Murdoch's Fox Television into a viable alternative to the Big Three networks, mining the premise that there was a younger, hipper audience than ABC, CBS and NBC were delivering to advertisers.
Then, in the 90s, running the home-shopping channel QVC and later the Home Shopping Network, he has demonstrated that advertising is not the only way to derive revenue from the remote-control constituency. From there, it was only a mouse-click or two to the realization that the Internet could be a lot like what some people used to call interactive TV.
So, Diller was soon extending the Home Shopping Network onto the World Wide Web. Then he was acquiring the electronic ticketing agent Ticketmaster and melding it with the city-guide Web company Citysearch -- even as he was also amassing a more conventional set of media holdings through his television empire, USA Networks Inc.

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All this past was prelude to Barry Diller's latest multimedia move. Last week he proposed a three-way shuffling of high-priced stock certificates through which Diller hopes to come out controlling a new company that would combine Lycos, a popular portal to the World Wide Web, with the electronic shopping holdings of his current company, USA Networks Inc.
The new operation, to be called the USA Lycos Interactive Networks, would entertain, inform and sell things to people online, on television and over the telephone. It was valued at $22 billion when it was announced on Tuesday, before Wall Street panned the deal, sending the shares of Lycos -- and the deal's prospects -- tumbling.
That initial investor skepticism does not mean Diller will not carry out the plan, of course. After all, Diller's best-known enterprises previously, the Fox Network and QVC, were seen as media Siberias when he started. But he was able to fire up enough perceived heat, and real business value, to create the next media sensation.
But the task of mastering both the style and substance of this deal will be Diller's toughest yet, since he has before never run something with as many disparate lines of business.

The Making of a Multimedia Mogul
As a top executive at ABC television, Paramount Pictures and then at the Fox network, Barry Diller spent the 1970's and 80's in the conventional media. But during the 90's, Diller has become a deal maker who symbolizes the convergence of old media and new media.
Dec. '92 - Feb. '95 Runs the home-shopping television network QVC Inc., while trying to buy other media properties.
Aug. '95 Makes deal for control of Silver King Broadcasting, a chain of independent TV stations, having left QVC after its takeover by Comcast.
Nov. '95 Returns to remote-control retailing in a deal to acquire Home Shopping Network, later combining it with Silver King into HSN Inc.
May '96 Starts First Auction, a Web site for selling HSN merchandise.
May '97 Acquires, through HSN, 47.5 percent of the telephone and online ticket-sales agent Ticketmaster -- the first step toward outright control.
Oct. '97 Makes deal for HSN to acquire the USA Networks cable channels and Universal Television production unit from Seagram, which are subsequently combined into a new company, USA Networks Inc.
Aug. '98 Agrees to merge Ticketmaster's online business with Citysearch, an operator of local cultural-events Web sites.
Feb. '99 Announces deal with the popular Web "portal" Lycos to create a new Internet player, USA Lycos Interactive Network.

"Barry has been brilliant in building the company," said John Tinker an analyst with Nationsbanc Montgomery Securities. "He has done OK in managing it. But now the challenge will be pulling all this together."
Diller argues that the complexity of his new deal reflects a world in which media companies and retailers are increasingly intertwined. Significantly, given his continued interest in the convergence of old, passive media and new, interactive ones, USA Lycos would aim to make its money as much from retailing as from advertising.
"I really do believe that there is a new convergence between information, entertainment and direct selling," he said in an interview last week. "Once you have the technology for interactivity, you can have direct selling and you can bypass the middleman."
Diller's road to the media shopping mall began in 1992, as he was looking for a venture after leaving Fox. Diller first noticed QVC on the recommendation of a friend, the fashion designer Diane Von Furstenberg. He marveled at QVC's capacity to translate a focused hour of televised product pitching into a frenzy of phoned-in sales orders.
So it was no accident that when Diller moved on to the Home Shopping Network, he became keenly interested the company's small outpost on the Web, the Internet Shopping Network, which was one of the first online computer stores. Diller decided that computers had too low a profit margin, and so he closed the store. But in its place he created First Auction, a site that offers some of the costume jewelry and collectibles sold on Home Shopping Network along with other merchandise like furniture, all of which have much higher profit margins.
The auction format, which has also been successfully adopted by Web companies like E-Bay, has transformed shopping on the Internet from a utilitarian exercise in ordering to the blend of entertainment and sport that has made TV shopping channels so successful.
First Auction's sales are now running at a $40 million annual rate, with few of the costs faced by Internet start-ups because it can use the warehouses and computer systems of the Home Shopping Network.
But until now, Diller's efforts to link the Internet and television have been modest and limited to some First Auction promotions on the Home Shopping Network.
He has found few ways to cross-promote his company's television operations -- the Home Shopping Network and the USA Network, a cable channel specializing in original series as well as movies, and its sibling, the Sci-Fi Network. Each network, he says, has a very different profile -- with Home Shopping appealing to older women and USA going after a younger audience.
Over all, however, analysts give Diller good, if not excellent grades, for his record of running the companies he has acquired.
Since coming to the money-losing Home Shopping Network in late 1995, Diller has turned it around. Last year, cash flow -- or earnings before interest, taxes, depreciation and amortization -- was $330.3 million and revenue of $1.07 billion. Yet, it trails QVC, which despite reaching one-third fewer homes is expected to report 1998 revenue of well over $2 billion and cash flow above $400 million.
But making deals may well be Diller's most notable accomplishment lately. Take his purchase of Ticketmaster, in two transactions in 1997 and 1998.
Shortly after gaining control of Ticketmaster, Diller realized that the company's small but rapidly growing Internet ticket sales site was as big as many of the Internet start-ups that were receiving huge valuations in the stock market. So he split off that business as Ticketmaster Online and merged it with Citysearch, a somewhat struggling effort to create Web-based local entertainment guides in major cities that had been started by an eccentric entrepreneur, Bill Gross.
With a combination of good timing and sales panache, Diller was able to sell 10 percent of Ticketmaster Online Citysearch in December in a public stock offering at $14 a share. Its shares subsequently rose as high as $80, although they are now less than half that, closing Friday at $36.50.
Still, USA's portion is worth about $1.6 billion, far more than the $610 million it paid for all of Ticketmaster. In fact, it is the high market value of Ticketmaster Online's stock that has given Diller the chips to raise his stakes in the Internet market.
Diller was worried about other big media companies activities online -- like the Walt Disney Co.'s effort to tie all of its media properties into one all-encompassing Internet portal, the Go Network. Among many other things, Go intends to offer the sort of local information that Citysearch does.
"We sat around watching what Disney was doing," Diller said, "and said if we don't get a relationship with a national portal, our desire to play a big game will be toast."
Diller began talking with a number of portal providers, and three weeks ago started talks with Lycos, which had been conducting its own public search for a partner.
At first, Diller proposed merging Ticketmaster Online Citysearch with Lycos. But the conversations soon expanded to include First Auction and then the rest of the Home Shopping Network -- along with the old-fashioned, telephone-sales portion of Ticketmaster.
"We realized we had to put HSN in with all its merchandizing power and ability to be a real retailer on the Net," Diller said.
The prospect of $1.5 billion in shopping revenue particularly appealed to Robert Davis, the chief executive of Lycos, which is based in Framingham, Mass. He has long prided himself on having a New England frugality that contrasts sharply with the Internet new math practiced by many of his Silicon Valley competitors.
"Lycos, Yahoo, Excite and the rest have been all dependent on pure advertising revenue," Davis said in an interview last week. "We believe that by moving to having more commerce and transaction revenue, we can have real earnings fiber."
Yet, the new game plan looked disappointing to holders of Lycos stock, which plummeted on word of the deal. Lycos shareholders had hoped that the company would be acquired for a big premium, the way that the portal Excite recently sold itself to the Internet-cable company At Home for nearly double Excite's stock market price. Even CMGI Inc., the investment company that took Lycos public in 1996 and still owns 20 percent of it, hinted it might vote against the deal if the company's stock stayed low.
By Friday, Lycos had bounced back somewhat. But it ended the week at $99.50, down 22 percent from its price before the deal was announced on Tuesday morning.
By week's end, even the initial enthusiasm of USA Networks' shareholders seemed to have faded, as the stock closed on Friday at $38 -- 12.5 cents higher than it was last Monday night.
Diller contends that any recalcitrant Lycos shareholders do not understand the deal, which he said would give them something rare -- a stake in an Internet company with real revenues and earnings.
As for the remaining pieces of USA Networks, Diller has definite plans to go on a shopping spree to build it into a bigger, more conventional media conglomerate.
"You will see us looking for opportunities to add cable networks, broadcast stations and probably film production and distribution," Diller said.
But Diller's history of testing the outer boundaries of new-media models suggests that he will not be content to concentrate solely on conventional film, cable and broadcasting. If he can get Wall Street to endorse last week's USA Lycos deal, Diller would control an Internet company with a market capitalization in excess of $20 billion.

Related Sites
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Home Shopping Network
Ticketmaster
Citysearch
Lycos
First Auction
E-Bay
USA Network
Sci-Fi Network
Go Network

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	Suzanne DeChillo/The New York Times
	Barry Diller, an executive with a knack for finding the hottest media fad, on a terrace overlooking Central Park. Diller's latest move is to combine Lycos, a portal to the World Wide Web, with the electronic shopping holdings of his current company, USA Networks.