PEOPLE Barry Dlller never had a secret plan to take over \lvendi. But he does have a not-so-secret plan to rule the Web. BY TIMOTHY J. MULLANEY AND RONALD GROVER IT LOOKED LIKE THE DEAL BARRY DILLER WAS BORN TO MAKE. ALL SUMMER, THE longtime movie and TV kingpin was rumored to be maneuvering to make his next big media conquest—the acquisition of Vivendi Universal Entertainment. After all, in the past decade Düler had made a play for CBS, another for Paramount Pictures Corp., and twice talked merger with NBC. But with the Sept 2 announcement that General Electric Co. was near a deal to merge Vivendi Universal into its NBC unit, DiUer once again looked luce the odd man out. Yet the 61-year-old Diller insists there was never anything to the scutdebutt. Sure, he had skin in the game. His company, InterActiveCorp, owns a 5.4% stake in VUE, and he personally holds an additional 1.4%. But he has sworn off Tinseltown for what he thinks is a far more promising opportunity—selling all manner of things over tiie Internet, "If s unfortunate people don't understand," 62 I BusinessWeek I October 13, 2003 Everyone thinks 'Hollywood vs. this? '... Hollywood is mostly a pain in the ass" PEOPLE ing him 3 of the top 10 most-visited travel sites. "I cannot imagine the year wül end without our making an acquisition or a series of acquisitions in the bühonor-so-dollar range," he says. He is eyeing acquisitions in travel, finance, and classified ads—and plans to push hard overseas. Ben Tompkins, an investment banker at Broadview Associates, says one attractive target is job-hunting site CareerBuuder.com. Search for: THE BIG SQUEEZE BEHIND THE WHEELING AND DEALING is a shrewd strategy to make IAC into something entirely new—a powerfiil combination of businesses focusing solely on e-commerce. For this, Düler is positioning himself as a new kind of cyber-middleman. He starts ^ by picking highly fragmented industries, such as ^ Expediax:om g travel, personal finance, and local entertainment. His companies intermediate between travelers and hotels, borrowers and banks, music lovers and concert halls. Think eBay, not Amazon.com Inc. Düler does not want to warehouse products like Amazon. Instead, he uses the immense power of the Web to gather boatioads of customers and deliver them, en masse, to seüers of products and services à la eBay. What makes Düler unique is his willingness to meld the ruthlessness of a Hoüywood mogul with the power of the Internet. Whüe eBay Chief Executive Margaret C. "Meg" Whitman strives to keep the online auction site's community of buyers and seüers happy, Diüer throws his weight around much luce Wal-Mart Stores Inc.—squeezing suppliers so he can take a bigger shce of the pie. He grabs extra profits by giving prime büling on his Web sites to suppliers that offer him the fattest discounts,fi-omflights to concert tickets. "In every one of our businesses, we're playing Düler says, rolling his eyes, as he a role in defining the economic laws," he says. paces a conference room at his Consider the killing he makes on hotels. A cusManhattan headquarters. "Everyone tomer pays $219 for a room at the Radisson Lexingthinks, 'Hollywood vs. this?' If they ton New York by going to the hotel's Web site. Expéunderstood anything, they'd know dia, by contrast, demands a wholesale rate of about this is interesting and Hollywood is" $151 and then charges the customer $189. The cus—long pause for effect—"mostiy a tomer saves $30, while Expédia pockets a 25% pain in the ass." markup, far more than the 10% travel-agency com"This" is Outer's baby, InterAcmission that was standard before the arrival of the tiveCorp. Thanks to a two-year-long Net. Why do the hotels play ball? "Expédia has 18 buying binge, IAC is becoming the mulion unique users a month—that's humongous," world's largest consumer e-comsays Kurien Jacob, distribution director at the Radismerce business. With an eclectic son Lexington, which fills about 100 rooms a day combination of businesses, ranging with Expédia customers. from the online travel powerhouse Expédia to the Net dating What happens if a hotel balks at heavy discounts? It may service Match.com, InterActiveCorp's revenues are on track to just find itself at the bottom of Expedia's hst of hotels. That's surge 34% this year, to $6.2 biüion—which Would make it what Jim Young, senior vice-president at Intercontinental bigger than e-commerce giants Yahoo!, eBay, and AmaHotels Group, fears would happen if the chain didn't play zon.com, LAC'S Expédia and Hotels.com are the two most along witii Expédia. "They have the abiHty to punish," he profitable online travel agencies. Ticketmaster gives him a says. Diüer makes no apology for strong-arm tactics in any of dominating 90% share of ticket sales for concerts and sporthis nine major businesses. What's more, he's positioning ing events. LendingTree Inc., an online mortgage-referral them to feed one anotiier, shuttling customers and coupons service, also provides an entrée into real estate. His cash cow, from one Webfiefdomto the next. § cable-TV retailer HSN, churns out profits he can use to throw If everything works as Düler plans, IAC could be riding a ^ his net ever wider on the Web. gusher of profits. U.S. Bancorp Piper Jaffray analyst Safa | And this relentiess dealmaker, with $5 billion in cash, is stül Rashtchy estimates that Lite's net income wül nearly quadruple " shopping. On Sept. 21, he announced a deal to buy next year, to $660 mulion, as its revenues rise 21.4%, to $7 7 bü- 0 Hotwire.com, a Priceline.com Inc. rival, for $665 million, givhon. That's right on par with the expected profits of everybody's ° Expedia's clout keeps hoteliers in line. "They have the ability to punish," says one hotel exec 64 I BusinessWeek I October 13, 2003 PEOPLE CONSIfiLIERE "Bar^ saS he wanted his own thing. Now he has it," says Kaufman ^ ^ ^ ^ ^ favorite Net company these days, eBay. Sure, DUlefs stock price hasn't reached the euphoric levels of eBa/s. If s trading at 43 times this year's projected earnings, vs. eBa/s 72 (page 70). But if s stiU an investor favorite. IAC stock is up 45% for the year, to about $34, compared with a 13% rise for the Standard & Poor's 500-stock index. Its market capitalization has hit $27 bUlion. But the script for InterActiveCorp hardly is assured of a happy ending. The company faces competition in nearly every market. And the most serious threat may come from InterActiveCorp's own business partners—hotel chains, airlines, banks, and others—who want to rein in Diller's ambitions, since his profits ofren come out of their pockets. They vow to fight back. On Sept. 8, for instance, Mandalay Resort Group in Las Vegas, a casino chain that owns the Luxor Las Vegas Resort Hotel & Casino, announced that it had puUed its top properties off Expédia and Hotels.com sites because Expédia insisted on controlling the price of the rooms sold on the Web site. "Eor people in the hotel industry, it was like crack cocaine. We give them rooms, and they fill them," says John Marz, Mandala/s senior vice-president. "But we lost control, and thaf s what everyone is trying to get back." Eor now, such efforts show httle sign of slowing down Düler's Web express. But if he botches relations or squeezes partners too hard, resistance could grow. LEFTCOAST NAPOLEON DILLER ALSO HAS TO CLEAR UP some accounting issues. Eor years, analysts have complained about the complexities of his accounting. Now he's fending off regulators in three states who say Expédia and Hotels.com haven't been coUecting enough taxes on their transactions. Expédia and Hotels.com pay taxes on the amount they pay hotels for the room, not on the higher price that consumers pay them, as regulators want. In a worstcase scenario, the bUl for back taxes could top $100 mUlion, ac66 I BusinessWeek I October 13, 2003 cording to Business^eek calculations. Far too much, says DiUer, who says he has cut the reserve for the issue to less than $10 million in the second quarter. The company is negotiating the taxes with Florida, New York, and Texas. For now, investors don't appear concerned. That gives DUler time to avoid a quick and expensive setdement. Instead, he's throwing tax lawyers into thefray,hoping they can strip the underpinnings from the states' case. The logic: The law in most states requires hotel operators, not travel agents, to collect the tax. DiUer believes he has a solid chance of prevailing, and WaU Street analysts agree with him. But if the legal tide turns against him, DUler has more than enough money to settle before the issue inflicts damage on investor confidence. The most difficult chaUenge for DiUer may turn out to be, weU, DUler. For his far-flung Web conglomerate to cUck, he must recruit and retain top-ffight managers. Yet since he took over ABC at the tender age of 26, he has been a Lefr Coast Napoleon, determined to dominate with his sheer force of personality and self-admitted proclivity for micromanagement. In the previous incarnation of his company, USA Networks, he churned through top executives like so many neckties, parting ways with a half-dozen high-profile executives, including current America Online Inc. Chief Executive Jonathan MiUer. "You're worthless one week, then you're the greatest, then you're worthless," says one exec who lefr. "WATCH MODE" DILLER ADMITS THAT HIS TOUGH-GUY STYLE has drawbacks. For help, he turned earUer this year to retired GE CEO Jack Welch. Acting as a consultant, Welch helped devise a structure that lets the heads of DUlefs businesses run their own operations day to day whUe DUler controls major issues such as mergers and budgets. Since June, when the system went into effect, "he's more in a watch mode than a micromanage mode," says Robert Diener, president ofHotels.com. Although DUler admits if s sometimes a struggle, he says he's keeping hands off the businesses, adding: "I don't have the time, I don't have the focus, and I don't have the depth of operating knowledge to do it." DUler appears to be weU on his way to becoming a genuine Web mogul. IAC is primed to ride the huge wave of Internet commerce, which is expected to soar from $78 bUlion in 2002 to $149 bülion in 2005, according to Forrester Research Inc. The orUine travel business, which already provides 40% of IAC's revenues and more than half its earnings, is growing even faster—more than 30% a year. Says J. WiUiam Gurley, a partner at Benchmark Capital, the venture-capital firm that backed eBay: "If he gets leverage across the businesses, thaf s going to be pretty damn powerftü." Music to DUlefs ears. He has aimed for the top since his early days, when he set his sights on being a HoUywood big shot. He grew up in a famUy of homebuUders in Beverly HUls, where his neighbors included Daimy Thomas and Dean Martin. He latched on to a job in the maUroom of talent agency WUliam PEOPLE Morris Agency in 1961, and by 1966 he had landed the top programming job at ABC. Almost overnight, Düler became a star. He was tapped for onefix-upjob after another. He revived Paramount Pictures in the mid-'70s, headed Twentieth Century Fox, then ran QVC for Comcast and cable-TV kingpin John Malone. out of the oven, and that, for me, was very exciting," he says. So he sold his entertainment businesses to Vivendi for $11.6 bulion, almost three times the $4 bulion he paid for them, cementing his reputation as one of the world's sharpest dealmakers. Duler now straddles two worlds. His office in LA sits next to Le Dome restaurant, a popular hangout with a view of the Hollywood Huls. His Manhattan conference room, by contrast, is anti-glitz. The view is of New Jersey condos, and the biggest decoration on the wall is a map of^ the U.S. Yet Düler is no DILLER ALWAYS DREAMED OF BUILDING his Own empire. In longer conflicted over which way to go. "Barry said he wanted 1994, whüe he was running QVC Inc., he launched a hostile and his own thing. Now he has it," says Victor Kaufnian, Deer's unsuccessful takeover bid for CBS. The QVC board forced his longtime œnsigliere and now vice-chairman of IAC. resignation for neglecting to ask for permission. So with help StiU, Duler wants more of his own thing, and his clearest shot from Malone, he bought the Home Shopping Network and TV at dominating an entire industry is in travel. Since the Septemstation group Süver King Communications, and began buüding ber 11 attacks, hotels have been stuck with a glut of empty a media conglomerate, USA Networks, which ultimately owned rooms, which they're willing to seü through Expédia and Hoa handfUl of cable channels and a TV programming studio. But tels.com on a wholesale basis. At the same time, Expédia is exin the fall of 2001, six years into buüding USA Networks Inc., he panding into the corporate travel business, in hopes that it can took stock and admitted to himself that he owned a media comgain the same kind of leverage over the airlines. The result: The pany that was second-tier at best—and always would be. "We two sites WÜ1 likely buüd on their combined 23% share of the didn't have enough scale on the entertainment side, and cononline travel business, says market researcher PhoCusWright trary to public opinion, I wasn't driven to get it," Diller says. Inc. And thaf s even whüe orüine travel bookings double from At the same time, he was drawn to e-commerce. He had their 2002 levels, to $65 büHon, by 2005, or 30% of all U.S. travawakened to the potential of TV retailing in 1992 when his friend el. Says PhoCusWright President Phüip C. Wolf: "They're going and now wife, fashion designer Diane von Furstenberg, sold to be the largest travel-distribution brand on the planet." thousands of scarves in one morning on QVC. And talks with Microsoft Corp.'s WiUiam H. Gates III and Apple Computer Inc.'s Hotel owners are complaining, but they lackfirepower.Five Steven P. Jobs hadftaeledhis curiosity for online retaüing. But big hotel chains—Marriott, Hüton, Starwood, Six Continents, these interests remained a sideline until July, 2001, when he and Hyatt—banded together to start rival site TVavelweh.com bought a 64% stake in Expédia, then owned by Microsoft. Whüe last year, but Travelweb's monthly Web audience is barely oneother investors were giving up on the Web, Diller believed it was tenth the size of Expedia's, and about a quarter of Hotels.com's. his best chance to estabhsh a powerhouse. "They were inventing Even the hoteliers doubt that they'll be able to roll back Expethings, buüding things, and acquiring things that were not even dia's gains. "I have never believed this wül go away," says Steve Harüdn, president of the electronic distribution unit at Starwood Hotels & Resorts Worldwide. The airlines haven't been able to combat Expédia, either. It keeps gaining market share—even at the expense of the No. 3 travel site, Orbitz which the airlines created as an Expédia killer. Now Düler is attempting to gain the same kind of clout in other businesses. He'll take Manhattan-and Tinseltown, His next target: real estate lending and and the high seas referrals. LendingTree, which attracts 1.7 mülion visitors every month, is angling JOB Chairman and CEO, HOBNOBBING With Diane Sawyer for slices of the $3 triüion-a-year mortand Susan Sarandon (above) InterActiveCorp. gage market and the $60 bulion a year that real estate agents coUect in housing HITCHED Married to long-time BORN Feb. 2,1942, in San sale commissions. In lending, it routes friend, clothing designer Diane Von Francisco, to Reva and Michaei each customer's loan application to four Furstenberg. Diller. different banks and makes an average of MOVIE NIGHT Catches the latest RICH GUY'S LOTTO Sold lAC s about $500 when the loan closes. In real flicks in a $1.8 million screening cable networks and production estate, it collects a fee for matching up a studio to Vivendi Universal for room IAC built at his Beverly Hills customer with a real estate agent. Lendsome $11.6 billion last year. The lAC home. ingTree takes one-third of the standard stock Diller took as most of his WEEKENDS Passionate skipper of 6% real estate commission, or up to payment is up 13% since then, his yacht, the Arriva. $3,530 on the median existing U.S. home while Vivendi is reselling the ON HIS OFFICE BOOKSHELF sale in June of $176,500. networks and studio at a 25% loss. Mostly art and architecture books, Diller's strategy is based on the notion WORKING STIFF Diller's salary is a with no business or movie tomes in that Web middlemen can profit handrelatively modest $500,000, and he sight. somely simply by bringing buyers and hasn't taken a stock option from lAC ON MEDIA TALES OF HIS sellers together. Changes in real estate since 1997. But he took $275 million TEMPER "I kind of like this shopping patterns strongly suggest his in stock to run Vivendi Universal apocryphalityofmylife." plan will work. A survey by the National Entertainment for less than a year. Association of Realtors, released in July, SOLD ON THE WEB Barry Charles DiUer 68 I BusinessWeek I October 13, 2003 PEOPLE showed 71% of shoppers begin their real estate search online, up from 41% in 2001. And a study by the California Association of Realtors says 23% applied for a loan pre-approval before picking a house, meaning LendingTree is likely to get a crack at millions of customers before they see a real estate agent. Even as business booms. Diner's legendary nastiness sometimes spills out. Earher this year at a meeting of studio executives, Diller, as part-dme CEO of Vivendi Universal Entertainment, unloaded invective on Universal's studio chief, Stacy Snider, when she fumbled some numbers, say two people who were at the meeting. Vivendi Universal CEO Ron Meyer later persuaded Diller to call Snider and apologize. "It was a moment of misstatement and fatigue that he seized upon," says Snider, who adds: "It doesn't represent the other 90% of my relationship with Barry Diller." Diller admits he sometimes goes too far. "I can't say there haven't been occasions where people have been humiliated," he says. Now, at least, he responds to suggestions. This summer, his business chiefs asked him to discontinue one of his traditions: much-hated weekly executive-team conference calls where he would invite operating unit heads to critique one another's strategies. Diller would jump in vwth barbed comments. When the meetings were canned, "there were cheers fi'om the countryside," Diller says ruefully. Is this old Hollywood hound learning new tricks? It certainly appears so. On the strategy front, he seems to be learning ft'om the mistakes of his past. For years after he bought Home Shopping Network in 1995 and began trying to buüd his own company, Diller never articulated a clear vision of'how all of the businesses would become more than the simi of their parts. That only fed speculation that he would chuck it all to make another run at a Hollywood studio. These days, though, Diller seems sold on the Intemet. "How could anybody not look at this as a great piece of extraordinary luck? I'm at an age, in a time, in a world, with a business with real growth in the most interesting sector of life and of business," he says. In a sense, Diller gets to enjoy the best of both worlds. He sdU goes to the Oscars, stiU hangs out at the Cannes Film Festival, and still gets his calls to Hollywood returned, pronto. And he's in a business with nearly triple the growth and profit margins of a movie studio. Why work in Tinseltown? For Barry Diller, ifs showtime on the Web. Ü 70 I BusinessWeek I October 13, 2003 COMMENTARY BY TIMOTHY J. MULLANEY How Diller Can Win Over Wall Street Three moves to bolster InterActiveCorp's stock adjusted net income, which excludes expenses such as amortization. IAC's STREET eamings under Generally Accepted Accounting Practices arefine:Wall LOVES Street estimates for 2004 range up to Barry $660 miUion. There's no need to jazz Diller, but up the story. IMPROVE CORPORATE GOVERNANCE not enough, as far as he's Diller runs IAC as a personal fiefdom. concerned. Even though His 11-member board is dominated by InterActiveCorp stock has people who have had close business and personal ties to Diller, including risen 45% this year—and his wife. One nettlesome sign of even though the Diller's control is that IAC pays half the maintenance on his Los Ángeles company has higher revenue and house—more than $200,000 a year— more cashflowthan such leading though IAC is based in New York. e-commerce players as Amazon.com, IAC needs a more independent eBay, and Yahoo!—it isn't as highly board that wül rein DUler in when valued as those companies. Its pricenecessary—and assure investors that earnings multiple of 43 pales next to IAC is their company, too. eBays 72, Yahool's 100, or Amazon.com's 86. But thaf s partly Diller's BUY BACK SHARES TO OFFSET fault: IAC's stock is held back by DILUTION IAC's big Wall Street investor concerns about its financial problem of late is the stock's 16% drop complexity, shareholder dilution, and since Aug. 5, when Diller explained corporate governance. how many shares he had issued to make Diller could strengthen J-pç 'nÇITtlv acquisitions. Investors the markef s tmst in him ""-^ "^ » ^ " ^ " • " decided there were too and in IAC with a few many shares to be bold strokes. He should supported by IAC's nearcarve out a little time term earnings. Tofixit, from dealmaldng to Diller should buy back simplify those reports, $15 bülion of IAC stock to improve corporate boost the compan/s governance, and do a eamings per share. large stock buyback to offset the 247 million These reforms will give new shares issued in this IAC higher eamings year's acquisition spree. quality and end questions Here's what to do: about whether Düler's company is too GIVE CLEARER FINANCIAL REPORTS incestuous. Even then, IAC's stock IAC gives skeptics ammunition by won't get an eBay or Yahoo-lü
Purchase answer to see full attachment