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WHY BARRY NEEDS LARRY

Dan Rather, sho was busy hosting cbs's live coverage of the O.J. Simpson murder hearings, couldn't chat. But Barry Diller got a friendly wave from the anchorman as he made a late-afternoon pilgrimage to cbs News on June 30. The chairman of QVC Inc. also made it his business to shake hands with several of Rather's off-camera colleagues. Such gestures mean a lot, especially if--like Diller--you have just announced plans to merge your home-shopping service with the Tiffany Network.

It's easy to make light of the $7.1 billion merger of cbs Inc. and QVC: Lofty meets cheesy; Black Rock meets cubic zirconia; 60 Minutes meets Can We Shop? But for Diller, there is nothing remotely lighthearted about the proposed deal, which was crafted in several weeks of supersecret talks between him and cbs Chairman Laurence A. Tisch. With home shopping in a rut and QVC's stock stalled, Diller needs this merger even more than cbs does.

COMPETING BIDS. If the deal goes through, Diller would jump from running an electronic bazaar to the helm of America's top-rated broadcast network. He would become the CEO and 3%-owner of CBS. Plus, the 51-year-old programming wizard might finally satisfy his own ambitions--and the expectations of colleagues and rivals who have eagerly charted his progress from Fox Broadcasting to QVC to an unsuccessful bid for Paramount Communications. "It's a deal that satisfies Diller's need to do something," sums up Porter Bibb, a media investment banker at Ladenburg, Thalmann & Co.

True, the merger may still come unglued. Some media executives say CBS could command a price of $400 per share--far higher than the $336 per share value of the QVC deal. As a result, many expect a competing offer for the network. But Diller points out that government regulations would make such a move difficult for rumored buyers such as telephone companies or Walt Disney Co. And Tisch says he fully expects the deal to be ratified at July 13 board meetings of CBS and QVC.

Both men have a lot at stake. CBS has suffered several setbacks at the hands of Rupert Murdoch's Fox Broadcasting Co., including the loss of pro football and eight affiliates. Although Tisch denies it, CBS insiders say he felt impelled to sell now for fear that Fox's kamikaze tactics were becoming common practice in broadcasting. "When Murdoch pays $1.5 billion for football and $8 million for John Madden," says one executive, "you're sending a message that economic stewardship has gone out the window."

Still, investment bankers and media executives agree that Tisch could probably have held out longer and still fetched a good price for CBS. Diller, by contrast, faces pressure on several fronts: QVC's stock, which zoomed up to 72 last August on the expectation that Diller would transform home shopping, has settled in the mid-30s. That's not much higher than when he bought 3% of QVC in December, 1992.

JEWELRY SLUMP. What's more, QVC's growth--which had galloped at a breakneck pace through the late 1980s--has begun to tail off. The company's net income dropped to $12.1 million in the first quarter of 1994 from $21.6 million in the previous year's first quarter. Much of that decline was a function of startup costs for new ventures, such as shopping services in Britain and Mexico. QVC also lost $831,000 on Can We Shop?, an ill-fated show with Joan Rivers.

But even discounting those losses, QVC's business looks sclerotic. In the first quarter, for example, the company's net revenues were up only 8.4%--far short of its 19% average growth rate in previous years. Diller also added just 1.1 million new subscribers in the quarter. That gives him 50.4 million cable households--4.3% more than a year ago, but again, a slower growth rate than in 1993 or 1992. One reason for that is the lack of channel capacity on cable systems. Even more worrisome, QVC's subscribers are spending less on its discount jewelry. Partly as a result, the company's first-quarter gross profit margin fell from 41.6% to 39%.

Diller insists QVC has returned to double-digit revenue growth since the first quarter. "This is a solid, vibrant company," he says. Indeed, with only $6.9 million in debt, prodigious cash flow, and powerful cable backers such as Tele-Communications Inc. and Comcast Corp., QVC remains a potent acquisition vehicle. While critics question the synergy between CBS and QVC, nobody doubts Diller's ability to finance the deal. CBS shareholders would receive $175 in cash for each share, or a total of $2.9 billion.

What Diller has not done--not yet anyway--is deliver on the promise of electronic retailing. His major programming innovation, a more upscale shopping service called Q2, has been hampered by weak distribution. Q2 is available in just 9 million homes. And retailers who have seen tapes of Q2's early programs say their mixture of lifestyle features and upscale products doesn't work. Q2 says it has commitments from cable operators for 32 million homes. And Q2 President Candice Carpenter says the programming will be refined: "It's a hard thing to come out of the gate looking great."

Even if QVC succeeds in breaking out of its niche, rivals are nipping at Diller's heels. Time Warner Inc. and Spiegel Inc. are developing an upscale shopping service called Catalog One. R.H. Macy & Co. still hopes to start a channel called tv Macy's. Meanwhile, QVC's

archrival, Home Shopping Network Inc., has boosted its cable subscribers from 28 million to 35 million, according to Chief Executive Gerald Hogan.

"CONCEPT BUY." The heightened competition hasn't checked Diller's ambitions. He still believes that he can harness digital technology to transform elec-tronic retailing. It's just that QVC will have to wait until channel capacity expands--probably another three years. "We'll

be there when it does," says Diller.

The question is: Will shareholders still be there, especially without the added attraction of a CBS deal? John Tinker, a media analyst at Furman Selz Inc. who is recommending QVC, acknowledges that the company isn't going to generate much earnings momentum in the next couple of quarters. Says Tinker: "This is still a concept buy."

With the proposed CBS deal, such issues may now be moot. Diller's losses overseas would be mere blips on CBS's income statement. And another good advertising sales season--such as the one CBS is now enjoying--would overshadow QVC's slow growth. That may help explain why Diller labored so hard to construct an airtight deal.

As a veteran of the Paramount battle, Diller knows that even good deals can be scuttled. But this time the stakes are higher. When Diller lost his Paramount foray, his colleagues loved the self-confidence of his concession statement: "They won. We lost. Next." If Diller doesn't pull it off this time, those words may ring hollow.

BARRY DILLER'S LONG MARCH

1967

A college drop-out and onetime mailroom clerk, Diller joins ABC-TV as programming executive. Credited with inventing the miniseries and TV movie, he rises to head programming within two years.

1974

Diller moves to Paramount Pictures as chairman, taking along assistant Michael Eisner. Revives languishing studio with such movies as Raiders of the Lost Ark and Star Trek and hit tv shows Happy Days and Laverne and Shirley.

1984

Diller leaves Paramount to run Twentieth Century-Fox for Marvin Davis and, subsequently, for media mogul Rupert Murdoch.

1986

Launches Fox network with The Late Show Starring Joan Rivers. After three years of lackluster ratings, Fox becomes financial success.

1992

Still frustrated by lack of control, Diller quits Fox. Rumors have him buying NBC. Instead, he signs a deal to gain control of home-shopping giant QVC Network Inc. Stock jumps 23% .

1993

Diller is named QVC chairman and chief executive. QVC launches a hostile bid for Paramount, a week after Viacom announces its own merger agreement with the entertainment company.

1994

QVC loses Paramount to Viacom, which offers $10 billion. On June 29, QVC and CBS announce tentative plans to merge.Mark Landler in New York and Ronald Grover in Los Angeles


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