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Diller's Latest Little Bet on the Net

It's cool to be Internet again. And so-called social-networking sites are like the good-looking newcomers from high school days -- everybody talks about them, but no one has the guts to ask them for a date. Except Barry Diller. In the first move into social networking by a major Net company, Diller's InterActiveCorp (IACI) will announce on Mar. 1 that it has acquired ZeroDegrees, a 6-month-old site in Santa Monica, Calif., devoted to helping businesspeople network to recruit staffers, arrange financing, and get sales leads.

InterActive, owner of consumer Web sites such as travel agency Expedia, is starting with the business-to-business end of social networking because execs believe it will be easier to make money there. Like early-stage Internet companies of yore, pure social-networking sites like Friendster and Tribe Networks have attracted curiosity seekers and initial members by not charging any fees. But, so far, these sites haven't generated notable revenues.

HEADHUNTER'S HELPER. ZeroDegrees works by encouraging members to enter information on their business contacts. The site's software then compiles a database of who knows whom. Let's say you're trying to arrange an introduction to InterActive Chairman Diller. You would search the database that now includes 218,000 names to see who you know who knows Diller, or knows someone who does.

If you find a match, you click on your contact's name, and fill out a message form asking for an introduction to Diller. (You can't, however, simply find Diller's own direct phone number or e-mail address).

Linda Nicolai, president of Los Angeles-based recruiter Executive Alliance Group, says she uses ZeroDegrees to find contacts who have left their old jobs and changed e-mail addresses. In one case, the service helped her locate a potential job candidate with whom she had lost touch and who's now in the running for a senior job at a movie studio. In another, it helped her find an introduction to a different studio executive, who hired her to run a search for a new staffer. Says Nicolai: "I use it every day."

GOT HIS M.O. WORKING. The deal appears to be more of an experiment than anything else. Terms weren't disclosed, but any likely price is surely a pittance vs. InterActive's $6 billion in cash and investments. The much larger Friendster's most recent round of venture capital last year valued that company at $53 million, Venture Economics research director Jesse Reyes says.

For Diller, it's par for the course. He did a series of small acquisitions before a spree of huge deals last year, when he bought the shares InterActive didn't already own in Expedia, and Ticketmaster, as well as all of online loan exchange LendingTree, discount coupon-book publisher Entertainment Publications, and British online dating service uDate (see BW Cover Story, 10/13/03, "The Web Mogul").

Diller's M.O. has often been to buy something small and promising. If it doesn't work, he quietly buries it. If it does, he gets a successful niche business, like InterActive's online dating service, which he bought for less than $50 million in the late 1990s.

"FAIRLY SHREWD FIT." Indeed, Diller appears to be institutionalizing InterActive's experimental side. Tucked into the ZeroDegrees announcement is the news that he has formed a department called InterActive Development to incubate new ventures. ZeroDegrees will operate independently of Diller's other businesses. So initial synergies will be minimal -- though Denis Pombriant, managing principal in tech-research firm Beagle Research Group, says the technology could be adapted to support InterActive's travel businesses.

Social-networking technology could also become a more central part of customer-relationship-management software, a business where Diller doesn't have a major presence. "This might actually be a fairly shrewd fit," Pombriant says. "It's about adding science to aspects of business that have traditionally been thought of as art."

Diller could make other forays into the social-networking area, says Dan Marriott, an InterActive senior vice-president and head of the new-business unit. He says the company is looking at other dating and social-connection sites, and might make an acquisition if the business can be tied to a classified advertising model, as San Francisco-based Tribe Networks is attempting. "The classified-ad approach Tribe has identified is a valid approach," says Marriott. "There will be a market there. But we felt the business side is the right place to start."

BEYOND 1999. Fellow Net leader Yahoo! (YHOO) also has an eye on the social scene -- Net style. In a speech in Silicon Valley last week, Yahoo CEO Terry Semel was reported as saying that while his outfit was watching the emerging industry closely, "We haven't seen any business models yet."

With the Net leaders cash-flush again, they seem to be thinking once again about experimenting and risk-taking. It's all a long way from 1999. And if risk begets innovation, then deals like this may signify the much-awaited thaw after the Web's nuclear winter. By Timothy J. Mullaney in New York

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