Spinning Web tales

Spinning Web tales
By Jim Hu
Staff Writer, CNET NEWS.COM

Barry Diller is waiting for the right time to say, "I told you so."

This consummate "old-media" deal maker has maintained a firm--if not stubborn--belief that the Internet economy is founded largely on smoke and mirrors that have wowed investors into propelling Internet stocks to illogical heights. And Diller is more than happy to point out the emperor's new clothes.

But it was this stubbornness that led to a showdown during his ultimately unsuccessful bid to acquire Web portal Lycos. Diller convinced Lycos that it needed a long-term strategy that would drive traffic from its television properties such as USA Networks, the Sci-Fi Channel, and the Home Shopping Network, into Lycos. From Lycos, users would be able to easily purchase goods and services from USA's other Web properties, such as Ticketmaster-CitySearch.

While the deal sounded good on paper, Net investors thought otherwise. Moments after Diller's USA Networks announced its bid for Lycos, the portal's stock plummeted. Riding off the company's 52-week high, investors could not warm up to what they saw as Lycos sacrificing its independence for a complex deal with USA. Despite all the enthusiasm executives from both sides tried to pump into investors, the companies faced the inalienable truth that the Web was not ready for this deal. Instead of sweetening his offer, as many urged him to do, Diller scrapped it.

Those familiar with Diller say the structure of the Lycos deal underscored a common theme in his approach to business: be opportunistic, find ways to build alliances between businesses, and focus on the long term. Those close to him remark at his talent in combining weaker standalone businesses to create stronger ones. This was evidenced when Diller married Ticketmaster Online to CitySearch, or back when he combined his cable properties with the Home Shopping Network.

Diller's business acumen was sharpened by his self-made rise in the entertainment industry. From his days working in the William Morris Agency's mail room to his tenure at ABC where he invented the miniseries, to heading Paramount, and then serving as Rupert Murdoch's right-hand man in running Fox, and beyond, Diller had trampled a 30-year path by unconventional means.

As an individual, the word "complexity" pops up frequently. William Shawcross, author of a Rupert Murdoch biography titled Murdoch, described Diller as a complexity fueled by passion. According to Shawcross, Diller is a "special kind of Hollywood creature. Aggressive and touchy, he could be both charming and psychologically overbearing. Powerful motorcycles, heavy skiing, and Democratic Party politics were his style."

It is passion that he demands, and it is his own passion that many who work for him respect and fear. "Killer Diller" is notorious for taking employees to task if they do not perform up to his standards or match his level of intensity. For example, Steven Chao, currently head of programming for USA Networks and the Sci-Fi channel, recounted for Fortune an incident in which Diller narrowly missed Chao after he threw a videotape at him during one of his tirades.

Many who deal with him also find him uncompromising, and unwilling to take "no" for an answer. Some have said nothing angers him more than employees who shower him with flattery or pad their shortcomings with excuses.

Despite his failed efforts with Lycos, Diller remains enamored with the Internet and its potential. In fact, he admits that he loses sleep thinking about it. But whether the Net accepts his courtship, his way of thinking, or his hard-nosed approach to inking deals that rest on long-term growth instead of short-term premiums are issues Diller hopes will be resolved when the Web bubble bursts.

CNET News.com caught up with Diller in his Ticketmaster office in West Hollywood, California, last week on a day after the Internet sector took a hit.

CNET News.com: After scrapping your merger with Lycos because of tepid investor response, are you jaded by the Internet and what it has become?
Diller: My enthusiasm for this revolution, which is what I think it is, is intact. I still believe, though, that you have to do the things that create actual, real businesses. They may not be here today, but the same rules apply, which is you have to impose your will to develop a business over a period of time that is in fact a business. My observation of, certainly not all of it, but a good deal of what's called "business" on the Internet isn't, and never will be.

Any examples of that?
No! I don't want to hurt people.

But you know, they're going to get hurt enough, I think, over time anyway. The thing that amazes me is that people in these businesses--particularly

the ones that are public--these people spend 50-plus percent of their time in public relations and in conferences and things having nothing to do with going from A to B to C to D, the kind of terrible, hard work that is engaged in actually developing a business.

So my only issue is that what's perverted this is all of this paper wealth that has been created. A lot of people have cashed it in different ways over the last period, trading in and out of things, etc. I think that's inherently unhealthy on many, many levels in terms of the development of a business. It's unhealthy for the people in the business because they get paid before they've developed the business, which makes their long-term zealotry for the activity dim. The ability to keep people engaged in an Internet enterprise is almost impossible because the moment you've taken something public and people are vested, they say, "Thank you very much. We're gone now."

What did you learn from your Lycos experience?
What I learned out of Lycos was obviously that the situation was unlike most situations that I've had any experience in. Often times when you've announced something or tell somebody that you're doing something, they're skeptical, they reserve judgment. Mostly their skepticism says, "It can't work, it won't work. It's terrible." But then they listen or they wait for developments and you have the ability to explain it to them. And if they hear something that convinces them, then they react positively.

In this transaction, nothing we said made any difference whatsoever. There was no space between the ears. What went in one ear was "no premium"; what came out the other ear was, "You don't get it, we're day traders. We're not interested in your arguments for the development of the business?so the hell with you!" Literally the only other thing that was said was that the opposing major shareholder, CMGI, went from cheerleading the deal to then trashing the deal in 48 hours. Once that happened, the drama was enjoined, there was nothing else to do.

NEXT: The Net--culture clash or perfect fit?

The Net--culture clash or perfect fit?

Reports have said that 65 percent of all Lycos shareholders were day traders.
You know, I said that because it was what was told to me and lately I've been corrected by the same people who told it to me...which is curious. Nevertheless, they don't know exactly what it is, but they are currently stating that they think it's 30 to 40 percent day traders.

Still, with CMGI's stake and [chief executive David] Wetherell's disapproval, over 50 percent would have voted no?
Well, the way this merger agreement was, it took 50.1 percent affirmative votes. A no vote of any kind is a negative vote. And since a good portion of the stock is held by people who own it for voting purposes, but subsequently sell it, they don't own the stock when they're asked to vote--there's nothing that you can do to get them to vote.

At investor conferences, both the Lycos team and the USA Networks team really stressed the infrastructure--as in the number of credit card numbers that you have and the ability to fulfill all these orders, etc. Is that the main selling point that you're offering potential partners?
In-between HSN and Ticketmaster, we have 25 million current names with credit cards; 40 percent have email accounts and our electronic retailing infrastructure is extremely strong. We take 120 million calls in a year; we manage at any given time a half a billion dollars of inventory among 20,000 stock-keeping units in a very sophisticated way. We ship 30 million packages a year. We do this all integrated at scale. All of it electronic and certainly the beginning struts of much of it organized to be delivered over Internet systems. So a lot of our revenue that supports this is of course from one-at-a-time retailing--video retailing of the Home Shopping Network. But all the systems that back that up are as electronically contemporary as it gets.

Are you looking around for another Lycos?
No

Or at least for someone to fill in what Lycos would have done?
We said it for a long time--we didn't think national portals supported by advertising were a particularly frothy long-term proposition--didn't then and don't now.

We were interested in taking the aggregation of audience in Lycos and making serial businesses out of it. And that was a speculation. The need we have was to be sure that we got enough eyeballs, audience being passed to us for our Ticketmaster-CitySearch site. There are several ways to someday achieve that--and those we are engaged in right now.

What got us there was the need for a national portal to toss audience to us. We were in discussions with six different people to give us that ability. We advanced the Lycos discussions because we became convinced that if we put our Internet commerce in, that in fact that could create a business for Lycos that we could take advantage of.

What are you looking at now for your Web strategy?
What we want to do is to make arrangements with people who have big aggregated audiences on their local spaces where they're going to have local offerings and have CitySearch be the local portal. We believe very much in the local portal business model.

Will these deals involve equity, or just simple partnerships?
We want some that involve equity, some that involve cash, some that involve partnerships. I mean, around the dial. We have enough of each.

I guess if you're really localizing now, what is it that you really want to be looking at toward the future? If you're really trying to look at local markets, is it all about the revenue that you're trying to attract?
There are so many local businesses that are "real" businesses, meaning that the business is not commoditized information. You sell a service. And presuming you don't spend all your money on marketing, you have a good margin. Now if we can build up enough of those and get people to seamlessly use this so that their habits are inside it, we think it's a good organizing structure.

Over time we're going to be in 70 percent of the U.S. by the end of this year and 45 cities, which is more than anybody else will be in. And that's our concentration. We believe in it. Of course, we could be wrong, but we believe in it, we very much believe in it as a way to organize one aspect of it. And then, of course, we've got our commerce sites, which is First Auction and City Auction and Hotel Reservations Network, which we just purchased.

Coming from the media side and being the deal maker that you are, was there a real culture clash in doing deals on the Internet? Is there a clash between how Internet and traditional media deals are done?
No, I don't think the transactions--the actual making of the transactions--is any different. The difference is for however long it lasts, all companies and media companies that have businesses are worthless

against an Internet piece of paper. So when the analogy is made to our businesses, our Internet shopping network business, which have real revenue, to let's say the transaction that involved Excite being sold to @Home at a 60 percent premium, that's combining one piece of paper, @Home, which has no subscribers essentially, with Excite, which has very little revenue. It's one piece of paper valuing another piece of paper at a premium, combining it and seeing at that time their stock go up. So then deal making is not in terms of the kinds of things you use--it's just in the fact that the two worlds currently are based on such different solar systems that you can't do it.

Now it may be true that these Internet valuations will not only sustain themselves, but will be worth whatever you're paying for them in 8, 10, 15 years. But it certainly defies any kind of gravity to look at most of these valuations and say they'll be sustainable over a period of time. That makes deal making very tough.

Any companies out there that you're really keeping your eye on right now?
Everything and everybody.

Anything that's particularly impressed you?
Oh yes, lots of companies particularly impress me. Other than the ones that are so obvious because they're already very well-known. But the ones that interest me are ones we're tracking in various ways to hopefully take an interest in one way or the other.

Will it take a correction on Wall Street for a lot of these media companies really to make their moves? Are they waiting for the correction? Seemed like you were kind of hedging your bets for the correction, too.
Well, we simply said, "We'll go this far, but no further." We didn't bid against ourselves and raise our bid for Lycos, which is what everybody was cheering us on to do....because we felt that would be too dangerous.

I think one of two things will happen: Either the valuations of the companies will come enough in stream with old media companies--correct enough for old media companies to yes, take opportunistic moves and buy stuff--or they will create Internet paper one way or the other with which to make acquisitions. But any media company that does not--any company, by the way, it's nothing to do with media--will probably be marginalized; it will take longer to get rid of them. Any company that is not actively thinking with a very big part of its heartbeat about the radical revolution that is the Internet is going to be marginalized at some point along the way. I mean, they can recoup, but they will be marginalized.

Do you think you're in a good position not to be marginalized?
I think we're in a great position. Look, believe me--we can screw it all up, but believe me--every night that I don't sleep, it's because I know so well we can screw it up. But a company that is positioned as we are with our cable networks, with our aggregations of audience between the USA Network and the Sci-Fi channel or the broadcast stations or HSN, in terms of television and film, production and distribution--I think we're very nicely positioned.

But on the other side of our business, whether it's TMCS or Ticketmaster or Internet Shopping Network or the Hotel Reservations Network or Match.com, all of which deal in one form or the other with Internet direct selling to people, that's the through line to both of our worlds. If we use them correctly, it's hard for us not to do really well, no matter what happens...unless we screw it up!