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Diller's Move Online May Signal New Era

By Andrea Orr

PALO ALTO, Calif. - It felt like the dot-com era all over again last week, when USA Networks Inc Chief Executive Barry Diller said he would spend up to $4 billion on Internet investments and rename his company USA Interactive.

On the surface, Diller's plan is not unlike that of fish-oil manufacturer Zapata Inc, which three years ago launched a quixotic plan to transform itself to an Internet powerhouse by buying up out of favor online properties. Or CMGI Inc., which was briefly hailed as a new economy visionary for its high-profile portfolio of Internet companies -- until most of them crashed and burned.

But now it is almost 2002 and most of the grand visions have turned into dramatic failures., which two years was bought for $6.7 billion was just sold for a paltry $10 million in bankruptcy court.

What could Diller possibly be thinking?

Unless the visionary behind the success of the Home Shopping Network has lost all his business sense, it appears that Diller has spotted the dawn of a new Internet era.

Suddenly Internet stocks are getting upgraded, dot-com companies are the subject of bidding wars, and the technology to bring high-speed Internet access into homes is fast improving. That means that more people will be able to take full advantage of online entertainment and other services -- and there will be growing potential for online transactions.

Internet analysts are hesitant to predict exactly how Diller will advance in this new landscape, but they have suggested a few likely strategies.

One is that Diller will make a bold play for an Internet media powerhouse like Yahoo! Inc, which could set him up as a major force in online entertainment, and also make up for the black eye he received from the dot-com world when he tried to buy Lycos.


Three years ago Diller tried to buy the Internet portal from CMGI, but backed down after shareholders and CMGI board members suggested Lycos could do better than align itself with company that sold cubic zirconia over the television.

Whether Lycos did better being acquired by Spain's Internet service Terra is debatable since TerraLycos Inc., today struggles along with most Internet content companies. Diller, meanwhile, is still around as a player, and perhaps is better off for not having acquired Lycos, since it leaves him free to capture bigger prey at much-reduced prices.

``It's probably going to be a megamerger, along with some smaller acquisitions,'' said Kaufman Bros. analyst Paul Kim. ''Probably a template (of what he will do) is what he tried to do with Lycos.''

But as far as Diller is concerned, the same synergies he saw in linking the popular home shopping television network to one of the largest Internet audiences could still apply.

Others say that assumption is simplistic.

``Well, gee, who wouldn't be interested in Yahoo?'' said Salomon Smith Barney analyst Lanny Baker. ``The only problem with Yahoo is its valuation. It is an expensive acquisition.''

For all the value Yahoo has lost, the company is still worth at about $9.28 billion based on its current stock price. That's far from the $100-billion-plus valuation it had just two years ago -- but it's still a hefty price tag for a company struggling to show any net profit.

A second strategy suggested by many in Hollywood is that Diller would use his Internet purchases to advance his long-standing interest in Interactive television and help link his online and offline assets.

``I think he is going to tie in as much as possible to broadband distribution by cable or entertainment programming,'' said Hal Vogel, who runs Vogel Capital Management, an investment fund specializing in entertainment and media.

Such a strategy could involve buying Internet music, film distribution, and other entertainment assets, or even infrastructure and cable properties.


But no one is ruling out the third possibility, that Diller's approach will be somewhat scattered and opportunistic: Buy up all the available properties from promising Internet sectors.

As much as Diller has pursued this diversified approach to date, it has worked pretty well. USA Interactive properties such as Ticketmaster, the online dating service and soon, the travel site Expedia, are solid Web businesses that take advantage of the Internet to sell goods or services where little inventory is involved and operating costs are low.

If this strategy has gotten a bad name from past failures like Zapata or CMGI, whose share price is down 99 percent from its peak, analysts now say it could make a lot of sense.

If it had once looked like the dot-com carnage would never end, it is now a new day.

Across most Internet business sectors are companies that are working quite well. They've learned to focus harder on the bottom line and how to generate more income with lower costs. Meanwhile, online traffic and transactions are still growing, although not as rapidly as before. Search engines like Google and Overture Services Inc. are profitable; secondary auction services like uBid Inc. are reaching a large enough audience to suggest other sites besides eBay might succeed.

Car buying has significantly shifted online and some companies like Autobytel Inc. are very close to making money. Classified ads, which from the start seemed a natural for the Internet are beginning to make good on that promise. After a lull in Internet merger and acquisition activity the online recruiting site HotJobs now faces two competing bids from TMP Worldwide Inc. and Yahoo! Inc.

``The suggestion that Diller might follow a strategy like CMGI is not a horrible analogy,'' said Salomon Smith Barney's Banker. ``Except for the connotation that might carry.''

. . . watch for more stories coming soon  


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