The New Barry Diller

Can he turn a bunch of shopping outlets, e-commerce sites, and cable channels into a media empire?

It is 10 a.m. on a sun-drenched Sunday in Los Angeles, the kind of day when big-time Hollywood executives wake up at their Malibu beach houses and maybe brunch with friends at the Hotel Bel Air. Barry Diller is having none of that. Fresh from a hike in the nearby hills, the 59-year-old media executive is padding through the converted pool house at the rear of his sprawling five-acre home off Coldwater Canyon, barefoot and sweating in his blue T-shirt and matching shorts. It has already been a heavy week of meetings, with more on his agenda. An agreement with the Professional Golf Assn. is nearing completion. Now, Diller is gathering papers he'll need to meet with executives from Microsoft Corp. (MSFT ), who are due at his house shortly. "The entertainment industry used to be so simple," he says. "You made a movie or a TV show, showed it in a movie theater, maybe sold some videocassettes," he says. "Now, if you're not whacked in the face by the complexity of this business, you're just not paying attention."

No one is likely to ever accuse Barry Diller of not paying attention to the shifting currents of the media world. The guy who all but invented the "movie of the week" concept for network TV while a twentysomething programming whiz at ABC, Diller has had his finger to the wind for nearly four decades. In the late 1980s, at the height of the power of the Big Three TV networks, he launched the Fox network, helping to splinter TV audiences with the help of a spiky-haired character named Bart Simpson. That was only a few years after Diller had resurrected the fortunes of Paramount, transforming the woebegone studio with a flurry of hits like Raiders of the Lost Ark and the TV show Cheers to cement his reputation as media miracle worker.

These days, however, Diller is preaching a transformation of a different sort. For most of the last decade since leaving Fox, Diller has assumed a self-appointed role as the media world's leading apostle of the coming era of convergence. Down the road a few years, he says, TV viewers will browse, shop, and select from their living rooms, ordering everything from a pizza to a trip to Fiji. And while that day may still be somewhere down a murky road, Diller isn't waiting.

Indeed, today Barry Diller is more merchant than media mogul. Working mostly out of sight, he has been cutting deals faster than a peddler on payday. Since 1999, he has struck more than 30 separate deals, collecting Internet sites, call centers, and warehouses--creating the backbone for a media world that Diller insists will be driven by the interactive sale of goods and services.

Eventually, media companies will generate more than half of their revenues from transactions, says Diller. That's just what his own company, USA Networks (USAI ), did last year, with more than two-thirds of its $4.7 billion coming from sales of everything from Suzanne Somers' newest diet book to tickets to a Los Angeles Laker game (chart, page 80). USA's Home Shopping Network (HSN) sold more than $1.7 billion worth of jewelry, cosmetics, and clothes, almost all of it ordered by remote-control-waving TV watchers who placed their orders by calling HSN's 1-800 numbers. Diller's discussions with the Microsoft brass that Sunday afternoon culminated in USA Network's estimated $1.5 billion purchase on July 16 of the software giant's majority stake in online travel site Expedia Inc. (EXPE ), making Diller the Internet's largest travel agent. "To call Barry Diller a Hollywood mogul just doesn't cut it anymore," says Arlen Kantarian, CEO of the U.S. Tennis Assn., which has broadcasting and merchandise fulfillment deals with USA.

As Diller sees it, the revenue model for the media business is shifting. Advertising dollars, which power the majority of such media giants as CBS parent Viacom Inc. (VIA ), are too unreliable to plan a business around, he says. The price of subscriptions, the lifeblood of media powerhouse AOL Time Warner Inc. (AOL ), can only be hiked so much. The media company of the future, says Diller, will increasingly have to rely on revenues from merchandise sales on TV and the Internet to offset the ever increasing costs of making TV shows and films.

There's plenty of skepticism about Diller's grand vision. For one thing, the concept of convergence has been on the radar for 20 years and counting. Yet fewer than 5 million U.S. homes today are equipped with interactive TV boxes, according to Forrester Research Inc. "The record so far is poor for getting folks to shop for more than just pizzas and other smaller impulse items," says Forrester analyst Josh Bernoff. "Shopping by TV was supposed to take over TV back in the 1980s," adds Arthur Gruen, president of media economic consultancy Wilkofsky-Gruen Associates. "We're still waiting."

There's also no shortage of criticism among fellow media moguls about Diller's vision. "Obviously, we disagree," says Jamie Kellner, a former Diller associate and now chairman of AOL's Turner Broadcasting System Inc. "Those are the assets Barry's got, so he's out pitching him." Indeed, this is the third time since 1998 Diller has re-focused the company around its shopping assets, following failed attempts to buy the NBC network and to merge with Internet portal Lycos.

Today, Diller concedes USA is "a second-tier" media company. Its two largest outlets, the USA and Sci Fi cable channels, reach no more than 1 or 2 million viewers at a time, a far cry from the tens of millions of viewers larger rivals like NBC or CBS can attract. That raises the possibility that Diller's shopping services or cable channels could be squeezed from TV dials in a world increasingly dominated by giants. The company has already had its first taste of that: In early August, cable powerhouse AOL Time Warner moved USA to channel 40 from channel 23 on several of its systems, giving AOL's Court TV the favored lower channel slot. "He is clearly a small player in a world of giants," says cable titan John C. Malone, whose Liberty Media Group (LMC.A ) owns a 21% stake in USA Networks.

Diller makes no secret of the fact that he's prowling for a major media property. He has a debt-free balance sheet and $2 billion in cash. And the company's recent numbers show other signs of financial health. While other media companies have struggled with an advertising slowdown, USA Networks reported a 19.5% increase in revenues for the first half of the year, to $2.7 billion, and a 13% increase in operating income, to $157.4 million. Unlike other media companies whose stocks are in a slump, so far this year, USA shares are up about 30%. "No one is better positioned than we are," Diller boasts.

"SERIAL KILLERS." Clearly, the transaction assets he has assembled are impressive. Ticketmaster (TMCS ), which last year sold more than 83 million tickets, and dating service match.com, are leaders in their categories. With Expedia, Diller will create what may be the media world's first fully functioning converged entity. The travel site, his soon-to-debut USA Travel cable channel, and his Hotel Reservations Network Inc. (ROOM ) Internet sites should sync together well. That kind of cross-promotion has USA projecting it will sell more than $750 million worth of stuff this year on the Net, third among Internet companies behind Amazon (AMZN ) and Priceline (PCLN ).

Diller intends to keep that momentum going with--what else?--more deals. "We're serial killers," he says. "Sometimes we can't stop ourselves." But what could slow Diller down is USA's Gordian knot of an ownership structure. USA has two large shareholders, French conglomerate Vivendi Universal (V ), with a 43% stake, and Malone's Liberty Media. Either company could block him from striking a deal larger than $2 billion. In fact, it was Vivendi vice-chairman Edgar Bronfman Jr. who blocked Diller's bid to buy NBC in 1998, fearing the deal would dilute his family's stake in USA.

But this time around, Diller's two largest shareholders may step out of the way if the USA chairman brings them the right deal. Vivendi Chairman Jean-Marie Messier is eager to find distribution for the films and music produced by his company's Universal film studio and record company. He had O.K.'d Diller's $4 billion bid earlier this year for Rainbow Media, which owns Bravo, American Movie Classics, and other cable outlets. But Diller pulled out rather than engage in a bidding war.

Nevertheless, Diller needs to move fast. Even with a huge first-mover advantage, Diller faces a media world that is quickly beefing up its ability to process merchandise and sell tickets. Cable giant Comcast Corp. (CMCSA ), which owns HSN's much larger rival, QVC, has made no secret of its aim to add households with its $40 billion bid for AT&T's (T ) cable unit. AOL is also likely to delve even deeper into the transaction business, and on July 23 invested $100 million in Amazon.com with an option to buy the rest of the online retailer. NBC, with a 40% stake in shopping channel ValueVision International Inc. (VVTV ), recently announced it was re-branding as ShopNBC. After the network promoted it on-air, ShopNBC's revenues grew to an estimated $500 million this year from $107 million in 1997. "We plan to be one formidable commerce engine for the peacock network," says Gene McCaffery, ShopNBC CEO.

Undeterred, Diller is sticking to his plans and seems willing to run the back office for now. In his view, media companies and advertisers will soon be beating a path to his interactive door. And the line, albeit a small one, is already forming. Hiring out its vast capabilities, including more than 12,000 folks manning phones and 40 warehouses and fulfillment centers around the country, USA Networks units run online commerce sites for the National Football League, the National Basketball Assn., and Sportsline, 20% owned by CBS.

So how do the disparate pieces of Diller's empire fit together? Diller can point to his July 16 accord with the Professional Golf Assn. as a convergence showcase. USA Network will broadcast the early rounds of many PGA events through 2007. USA's Ticketmaster will sell tickets, and USA's e-commerce folks will operate PGA.com, selling golf shirts and equipment housed at and delivered from Home Shopping Network warehouses. And even when final rounds are telecast on NBC or CBS, the PGA site will be heavily promoted, funneling folks from other networks to the USA-run Web site. "It's a full-circle vision for us," says Donna Orender, a senior vice-president at PGA Tour Inc.

Deals like these surely aren't of the scale Diller is used to. But Diller acts no less the entertainment mogul. To give USA's various holdings a slicker, more Hollywood appeal, for example, Diller recruited from his former staff at Fox. Both USA Cable President Steve Chao and Mark Bozek, president of Home Shopping Network, once made TV shows for Fox. Diller himself, though, still sets the creative tone for the company. The USA chief executive is famous for dashing off streams of e-mails. Jetting between Los Angeles and New York almost weekly, Diller attends most idea meetings, and his input isn't always gentle. Recently, he spent a half-hour debating over the type size on a push-button for a new Web page Ticketmaster had designed. "The meeting was confrontational and aggressive," says Ticketmaster CEO John Pleasants. "But in the end it was all about making that push-button better for the consumer. That's what Barry brings to these decisions."

Diller recently hired British programmer Michael Jackson, chief executive of Channel 4, to run USA's film and TV production operations. That move will likely free Diller to go back to scouring the landscape for the perfect deal. These days, he is said to be rummaging through the Internet bin, sizing up Amazon.com and Priceline.com Inc., both of which he has passed on before. Another hot prospect is film studio MGM. For much of the last year Diller and MGM Chairman Alex Yemenidjian have talked merger, but Diller so far has been unwilling to offer a high enough price. Such a deal would give Diller access to MGM's library of 4,100 movies and stakes in 14 cable channels, including Bravo and American Movie Classics. Then, the scuttlebutt goes, Diller would make yet another bid for NBC or Yahoo! Inc.--maybe both--to create an ever larger company. Diller and Yemenidjian won't comment.

Can the one deal be far away that will transform Barry Diller's sturdy little retailing operation into a major media player? As media giants fast consolidate, Diller risks being left behind. "There are only so many seats at the table," says SG Cowen Securities Co. analyst Ed Hatch. While few companies can match his ability to take and fulfill orders, it won't be long before media rivals can do much of that themselves. Diller admits that "giant tectonic" plates are moving around him, and the landscape will be vastly different a year or two down the road. The man who invented the movie of the week knows a dramatic moment when he sees one. His best transaction may be still be ahead of him.

By Ronald Grover in Los Angeles and Tom Lowry in New York

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