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NEWS ANALYSIS by Ron Grover October 1, 1999

Barry Diller, a Wallflower at the Media Merger Party?
The USA Network CEO says he's not rushing to find a partner -- but the possibilities are dwindling

He has always been one of the media industry's big idea guys. As programming chief for the ABC network, Barry Diller invented the miniseries in the 70s. A decade later, he gave America the Fox network, the first net to break the stranglehold of broadcast's Big Three. But these days, the 57-year old mogul faces the prospect of getting left in the dust of a fast-consolidating industry. With the merger of CBS and Viacom, Paramount Pictures' parent company, Diller is suddenly down to precious few potential partners to give his USA Networks the national platform it needs to compete against the big boys of the media business.

Diller acknowledged as much on Sept. 30 at USA Networks' annual meeting in New York. "We're a middle-tier player in a much larger world," he told the handful of USA investors who had gathered in the penthouse of the Parker Meridien Hotel. In fact, his company this year will have sales of more than $4 billion -- not bad, but hardly in the company of such giants as Disney, which will likely approach $30 billion this year. Does he want to be in Disney's league? You bet. "He wants to be a national media company," says one power broker who knows Diller well. "So far, he's a very large retailer."

NOT BIG ENOUGH. That's not what Diller had in mind in mid-1995, when he joined USA, at the time a string of low-powered TV stations associated with the struggling Home Shopping Network. Since then, he has gone on a buying spree, snapping up such well-known companies as Ticketmaster and the USA and Sci-Fi cable channels. All told, today Diller can reach more than 70% of America's households with his cable channels, shopping network, or broadcast channels.

The problem is not many of them are turned in at any one time. His largest TV company, the USA cable network, is seen nightly by an estimated 2 million households. Not bad, but nowhere near the 20 million who tune in nightly to NBC's ER or Friends, or even the 3 million who recently tuned into UPN's comedy Moesha. For Diller, who sees the key to the success for tomorrow's media company as its ability to sell folks merchandise along with advertising to offset the ever-increasing costs of programming, those kind of numbers aren't likely to cut it. As Diller knows, the media game depends on how many eyeballs you can collect at any one time.

To his credit, Diller has assembled a massive company. Last year, more than 16 million people ordered 40 million packages, with 8 million more logging on monthly to visit USA's Ticketmaster Citysearch or one of its other 15 Web sites. But his reach is limited. His USA and Sci-Fi Channels are constrained by their carriage on cable TV and on satellites, which reach about 70% of the country and are usually a single stop on a dial that has 60 or more channels at a time.

EVERYBODY'S TALKING. Diller says he's not worried. He told his shareholders that his company intends to be opportunist and sees no need to rush into the arms of a large media partner. "I'm not going to say it isn't going to happen," he says, "but I don't see the need right now." Still, in recent months, he has held conversations with Disney over allying with its ABC unit, with NBC executives, and even with Fox chief Rupert Murdoch, with whom he openly disagreed prior to his 1992 departure from that company. "Everyone is talking to everyone," he says. "Except, I guess, CBS and Viacom."

Diller himself once chased CBS back in 1994, when he headed QVC. He left the shopping network when QVC's investors objected to his talks with CBS. And since joning USA, he admits that he talked about a deal with NBC, pulling out only when USA major investor Seagram Co. objected because the liquor company would see its USA stake diluted. In August, he talked with ABC, sources say, although that deal seems to have fallen apart over which of the two companies would control the combined companies.

Where does that leave Diller? The 13 stations he owns have immense value. Even with limited audiences at the present, they have licenses to serve eight of the nation's top 10 cities, including two that can reach the New York City area. He has plans to put local programming on each, and he has signed on such high-priced programs as the Miami Heat and Atlanta Hawk basketball games in those cities. Moreover, federal requirements that stations offer digital signals within the next few years give USA as many as six channels for each one it now operates in those cities.

Moreover, USA's TV stations are now a hot commodity. Recently passed rules by the Federal Communications Commission lifted restrictions on companies owning more than one TV station in a single market. ABC and NBC, both of which want to own more channels in the major markets, would love to get their hands on the added USA channels over which they could air more of their programs or reruns of shows aired earlier in the week. "We have to restring our needle," says Diller. "We have some tough decisions. Are you a buyer or a seller?"

WIDER REACH. The betting is that Diller will be a little of both. One top Diller hand says the company is still likely to strike a joint venture with a large media company, probably one with a broadcast network. That would give Diller the ability to get a national audience for some of the shows produced by his USA studio -- shows that currently include Xena: Warrior Princess for syndication and Sliders for its Sci-Fi Channel. It also has a large library of older shows, including Hercules and Weird Science. Moreover, as more and more consumers sign up to buy digital services from their cable companies, Diller's company would have a larger number of customers for the jewelry and porcelain plates that the Home Shopping Network sells.

The key to any deal will be the level of control that Diller retains over his media properties. So far, he has resisted anything that would take away his ability to call the shots. Last year, Diller wouldn't merge his USA Studio operations with NBC because it would have spun off the new assets into a new company and taken control from him. But the diminishing number of potential partners makes it less likely that he can continue to hold fast. NBC, for one, doesn't seem to need him. It recently struck a deal to invest in Paxson Communications' group of 77 TV stations and has assembled its own shopping properties by buying a piece of the much smaller ValueVision shopping service.

For Barry Diller, creating a giant media company would be the culmination of a brilliant 35-year career in the business. He says he's in no hurry, and he has a unique contract with his shareholders that allows him to lead USA well into the future. But those investors signed on to help Diller create the media company of the future. And to do that, he has to find a partner soon before there aren't any left for him.

Grover is Los Angeles bureau chief for Business Week

EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

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