) to spin off the online travel agency. So he pasted a photo of Steven Ballmer, then Microsoft's president, on his International Association of Travel Agents card and waved it in front of him. "Do you want to be the world's largest travel agent? Because I do," Barton said. Ballmer, Microsoft's CEO now, got the message.
Six months later Microsoft sold 20% of Expedia in an initial public offering. It later sold an additional 10%, and on July 16, it agreed to unload the rest to Barry Diller's USA Networks Inc. for a deal valued at $1.3 billion to $1.5 billion.
At first glance, it looks like a mighty good deal for Diller, and a mighty strange one for Microsoft. After all, the folks in Redmond are hardly slouches at negotiation, yet USA is getting the shares for as much as 20% below what they were trading before the deal was announced. And Expedia is no dot-bomb; it's a leader in one of the few promising e-commerce businesses. The forecast of a cash profit this year has pushed its stock up nearly fivefold, to $49.67, since January.
Moreover, the benefits for Diller are clear. USA has spent the last six years building a company that uses its TV programs to drive business to its Web shopping sites. Expedia adds an important piece to the puzzle: it will link to USA's discount lodging service, the Hotel Reservation Network, and to its recently acquired cruise and vacation package company, the National Leisure Group Inc. Later this year, USA will add a new travel channel. The marriage of TV and direct shopping "is inevitable, and it's now in evidence," says Diller.INSTANT ALERTS. So why is Microsoft selling Expedia so cheaply? For one thing, it is generating accounting losses that pinch Microsoft's earnings. But more important, Microsoft may need Diller more than Diller needs Expedia. USA Networks has a database of 30 million customers who have shopped on its Home Shopping Network or bought tickets through its Ticketmaster business. Microsoft badly wants those customers for its HailStorm service--a technology under development that will let companies notify customers of specific events and automatically update their calendars when they make appointments online. Microsoft sees HailStorm, for which it will charge a monthly fee, as a key new revenue stream.
Already, Expedia has become a HailStorm poster child with a service that alerts travelers by e-mail or pager when their flights are delayed. But Hailstorm needs more than Expedia to make it fly, and Microsoft figures getting closer to Diller and his array of e-companies will help. "USA Networks has a broad reach...which Microsoft can leverage to reach consumers," says Microsoft Vice-President Yusuf Mehdi.
Microsoft may have sold Expedia on the cheap. But Gates & Co. know how to build new businesses. And the payoff from this deal could be huge. By Jay Greene in Seattle, with Ronald Grover in Los Angeles