Does money grow on Barry Diller? Usually, when a company announces an acquisition, its stock drops and that of the target company rises. But when Diller announced on Feb. 9 that he plans to merge the Internet assets of his USA Networks Inc. with portal company Lycos Inc., shares of USA rose 10%, adding $1.2 billion in value. The stock of Lycos dropped 26%. "We gave him a couple of million, and he turned it into billions," says Robert R. "Dob" Bennett, president of Liberty Media Co., a partner that owns a 21% stake in USA Networks.
No one should be celebrating more than Diller's most important partner, Edgar Bronfman Jr. The Seagram Co. president has gotten far more from partnership with the 57-year-old Diller than money. Bronfman has had a shaky launch as an entertainment mogul since taking over Universal Studios Inc. in 1995. Universal's theme parks and music are doing well, but its core movie studio has brought to the screen a string of so-so films and money-losers such as Babe: A Pig in the City.
But Seagram's interest in USA Networks has given Bronfman solid success on the small screen. And, in the year since Bronfman traded the original USA Network, Sci-Fi Channel, and Universal's TV production unit for 45% of Diller's outfit, the value of his stake has gone from $2.75 billion to some $5.75 billion. Almost as important, the company that Diller is creating could provide a powerful outlet for Bronfman to sell music, videos, and other merchandise from Universal and his Polygram units.
Even before announcing the Lycos deal, USA Networks was on its way to becoming the prototype of the 21st-century media company. With TV audiences fragmenting, Diller is fashioning an outfit that will rely nearly as much on direct sales as on advertising. Last year, it sold more than $1 billion in merchandise over its Home Shopping Network. On the TV network Diller is building with his USA cable network and 16 local TV stations, he doesn't just depend on the traditional revenues from cable operator fees and advertising. "They are doing what all cable companies are trying to do," says Merrill Lynch analyst Jessica Reif Cohen. "Find the retail revenue stream that goes with advertising and cable fees to help pay for higher costs of programming."
Lycos, the third-largest Internet portal, would give Diller's retail business, which includes the powerful Home Shopping Network, a wider outlet to the Net. This year alone, figures NationsBanc Montgomery Securities analyst John Tinker, USA Networks will sell $60 million through its online First Auction service, five times its 1997 sales. And it will generate another $30 million through ticket sales on Ticketmaster Online, which launched last year.
Lycos, which will be merged with USA's Internet assets, will give the company access to 30 million people online through its four national and 19 regional Web sites. "Any media company that doesn't have a large footprint in the world of electronic commerce on a worldwide basis is going to be in trouble," Diller says.
To sign the deal, Diller needed approval from Bronfman, who has effective veto power over major business moves in a complicated formula tied to his equity stake. Despite Diller's record, Seagram doesn't always go along. Bronfman blocked Diller from striking a deal to buy a 50% stake in NBC from General Electric last year, for example.
Bronfman, for now, is busy fixing the movie business and slashing costs at Polygram, the music giant he paid $10.4 billion to acquire. He can let Diller build up the TV and online business. And Seagram has options to lift its stake in USA to 50.1% by 2002. That would give Bronfman a shot at running USA, too--but only if Diller volunteers to leave.
Can the two moguls coexist in the meantime? Sources at Seagram and USA say the two confer often, and that the 43-year-old Bronfman shares Diller's vision for a larger company. "Essentially, he's in the position of waiting for Barry to move on, one way or the other," says a Bronfman associate. Until then, Bronfman can sit back and count the money Diller is making for him.