The code name they chose for the deal was Tier One. So when USA Networks (USAI ) Chief Executive Barry Diller and his Vivendi Universal (V ) counterpart, Jean-Marie Messier, unveiled their $10.3 billion deal to merge USA's cable channels and TV studio with Vivendi's Universal film studio, no mystery existed as to where it is these two moguls want to go. Their goal: to catapult Vivendi Universal, once a little-known French water utility, into the upper strata of media companies. Yet for all the hoopla about Barry Diller's heading a Hollywood studio again, no one will soon confuse the new company with the likes of AOL Time Warner (AOL ), Walt Disney (DIS ), or Viacom (VIA ).
Sure, Messier coupled the USA deal with his $1.5 billion Dec. 14 equity stake in satellite-TV company EchoStar Communications (DISH ). That gives him a fast-growing launching pad with more than 6 million subscribers so that Diller can create new cable channels. And if EchoStar's planned merger with General Motors Corp.'s DirecTV Inc. (GM ) is approved, that could grow to 17 million subscribers.
But cable channels by their nature deliver shows to tiny slices of the audience, nowhere near what a powerhouse needs. USA's four cable channels, for instance, are received in 80 million homes. Yet they collectively generate audiences of less than 3 million at any one time for popular shows such as USA's Walker, Texas Ranger. By comparison, the WB Television Network gets that many viewers for just its lowly rated show Raiding Dad.
Which is why Diller admits that Vivendi Universal Entertainment is "a work in progress" that could desperately use a TV network to deliver large numbers of eyeballs. The economics of the media business today require vast audiences to cover the enormous costs of making movies and TV shows. Enter NBC, which Diller has unsuccessfully tried to buy at least twice in four years. NBC is also the last remaining network not owned by a major media company. Messier also covets NBC, according to sources close to him. Can Diller see NBC being a part of his vision for Vivendi's new entertainment unit? "Absolutely, always," says Diller.
Problem is, NBC isn't for sale. But Diller and Messier may be successful at wrangling a joint-venture deal out of General Electric Co. Since foreign companies can't own TV stations, Vivendi could create a U.S. holding company to hold its stake in the network. For NBC, the economics would be every bit as compelling as for Diller and Messier. Coupling NBC's network with Vivendi Universal's cable channels would create a mighty TV showcase for big-ticket events such as Harry Potter and the Sorcerer's Stone. Disney snared that film by offering a steep $70 million, which it hopes to recoup by showing it on both ABC and later on its newly acquired ABC Family Channel.
For now, Messier and Diller say they have plenty on their plates. The EchoStar deal lets them develop five new channels on the satellite service. And Diller will run Vivendi Universal's movie studio, TV studio, and its theme parks in California and Florida. It's a media business, all right, though still a pipsqueak. Still, that's nothing a little Peacock couldn't cure.
By Ronald Grover
With Tom Lowry in New York and Carol Matlack in Paris