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Diller thriller keeps Universal on edge of its seat

The tension is palpable at Universal Studios as USA Networks CEO Barry Diller considers merging his media empire with the studio’s Vivendi Universal parent.

“All we know for sure is that Barry Diller is going to be a helluva lot richer a week from now,” said one senior studio executive who was about to attend the Universal Christmas Party.

Vivendi Universal, seeking an elusive U.S. distribution outlet for its array of television and film assets, said on Tuesday it was in talks to buy the entertainment assets of USA, which is about 40%-owned by the French company.

Whatever Diller does, there’s the matter of the 21% stake held by John Malone’s Liberty Media in USA. If he chooses to dig in his heels, Malone – a brilliant but difficult financier – can make any deal with Vivendi highly inconvenient, if not impossible.

“Any time you try to get John Malone in the boat it’s expensive and tedious,” one industry source cracked. “So, anything that involves Malone is going to be complex.”

Diller’s question of “Where from here?” seems symptomatic of a syndrome common to many growing media groups. In the 1990s, CNN founder Ted Turner mulled a challenge of how to achieve more mass at his Turner Broadcasting and ultimately decided to cast his lot with Gerald Levin’s Time Warner – only to rue the day eventually.

The general consensus at Universal is that Diller will take the top corporate job and be in charge of all content at the new operation. As such, Diller may fulfill Vivendi Universal CEO Jean Marie Messier’s objective of bolstering Vivendi’s stock price, which Messier feels is undervalued, by persuasively communicating the value of the company’s various assets.

But that’s left studio execs apprehensive. After years of uncertainty and management upheaval, the studio has stabilized. It’s riding high on a string of worldwide hits and gets high marks around town as an efficient and well-run organization.

Diller’s controlling management style is at odds with Universal Studios president and chief operating officer Ron Meyer’s strategy to redistribute control from the Black Tower to the company’s individual operating units.

Meyer is admired as a motivator, not a micro-manager. Diller’s presence is much more ubiquitous in the companies he has controlled.

And it’s unclear what a Diller regime would mean for Pierre Lescure, co-chief operating officer of Vivendi Universal and self-described translator between the company’s trans-Atlantic divisions.

Another potentially lost soul is Michael Jackson, the very high-profile Brit recruited by Diller only four months ago to oversee the company’s entertainment operations.

One scenario is that Lescure and Jackson could become members of an overarching creative board that would exercise authority over both film and television. Universal Music Group CEO Doug Morris could be another candidate for that committee.

Malone was unavailable for comment. But Lee Masters, chief at Liberty Media’s Liberty Digital, said Messier would be violating his “fiduciary responsibility to shareholders” if he gave total ultimate control of Universal and USA to Diller.

Masters predicted Diller ultimately will decide to sell off the TV assets, and apply that cash to his online businesses.

A minority opinion contends that Diller will relinquish only the TV assets to Vivendi, keeping intact a business comprised of his original Home Shopping Network and Ticketmaster, along with the sundry digital operations.

This theory contends that it will prove impossible to convince the fiercely independent Diller that any role under Messier would be sufficiently autonomous.

A few years back, conventional wisdom had Diller stewing over then-Universal boss Edgar Bronfman Jr.’s refusal to allow USA to merge with NBC. But that wasn’t quite the case, the source confides.

A proposed board makeup granted Diller enough USA seats to assure a high degree of operating control of the merged entity. But it still wasn’t total control and so was rejected by Diller.

“That kind of thing could mean he ends up just staying on top of his Internet assets,” the source reasoned.

If the TV transaction is the one that moves forward, Vivendi Universal would get cable networks USA and Sci Fi plus USA Films and TV production arm Studios USA. That would leave Diller with the Home Shopping Network cable net and e-commerce site as well as Ticketmaster/Citysearch, USA’s online hotel reservation network and the personals site Match.com.

Diller also is in a $1.5 billion deal to buy 75% of online travel site Expedia.com from Microsoft, and recently said USA had roughly 20 smaller deals under various degrees of discussion in an effort to expand its portfolio of transaction-related entertainment assets.

The idea would be to set aside the media sector’s age-old dependence on the cyclical and finicky advertising market and shift toward a media-retail hybrid – one that throws off piles of good old-fashioned cash flow.

“It started with HSN, which taught us that the merchant sensibility creates margin,” Diller told analysts recently. “That’s what we have done.”

HSN, while lagging behind larger TV rival QVC in scale and revenue, improved its profitability by 300% in 2001 and is widely recognized as a cash cow that has floated the USA and Sci Fi channels through the brutal ad drought of the past several months.

Diller’s vision is to exploit this cache of moneymaking entertainment and leisure-themed businesses, drawing consumers in at one end and selling them more goods and services from the other. All the while, he’d compile a treasure-trove of customer data like names, credit card numbers and buying habits.

If Vivendi buys USA’s TV and film assets, Diller should also get a sizable cash payout that will help finance his growth plans for the remaining businesses.

“What Barry would get from the (Vivendi) transaction would be the freedom to grow a very promising interactive business,” said Chase Manhattan analyst Vinton Vickers. “If it’s freedom he’s seeking, it’s hard to see why he would go to work for Vivendi.”

Dennis Miller, general partner in Constellation Ventures and former exec with Columbia Pictures TV and Turner Broadcasting, predicted Diller will opt for slimming down to become “the dominant player in interactive convergence.”

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