The Wall Street Journal-20080212-HSN May Be Key to Ending Diller-Malone Feud- Home-Shopping Network Performs Better- Making It A Good Bargaining Chip
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HSN May Be Key to Ending Diller-Malone Feud; Home-Shopping Network Performs Better, Making It A Good Bargaining Chip
Full Text (1159 words)The key to resolving the bitter quarrel between Barry Diller and John Malone over control of IAC/InterActiveCorp may come down to the celebrity fashion designs, antiwrinkle creams and exercise mats on which they built their business relationship.
IAC's fourth-quarter results last week included signs of improvement at home-shopping network HSN, one of the media moguls' first business ventures together. That could make it easier to negotiate a deal in which Mr. Malone's Liberty Media Corp. would take control of HSN and possibly another asset in return for giving up its majority voting stake in IAC. That could help the two men settle their legal dispute -- sparked by an IAC proposal to spin out four businesses in a structure that would dilute Liberty's control -- before it heads to trial in March. Both sides are expected to turn to Allen & Co., the boutique investment bank with close ties to both companies, to help broker such a deal.
Messrs. Diller and Malone have considered such a swap in the past. The two discussed exchanging the bulk of Liberty's stake in IAC for HSN a year ago but failed to reach agreement because of concerns about HSN's faltering performance. Liberty already owns the No. 1 home- shopping channel, QVC, and saw potential benefits in owning both, but Mr. Malone thought his stake was worth far more than HSN, while other executives worried the troubled HSN would require too much management time to fix. "We got close," said Mr. Malone in an interview last fall.
But with its improved performance, HSN is "more useful [to Liberty] today than it ever has been," says Scott Devitt, managing director, Internet consumer services, at Stifel, Nicolaus & Co. "TV commerce is a mature industry, and in mature industries real scale is really valuable."
HSN has begun to hit its stride under retailing veteran Mindy Grossman, who was lured from Nike Inc. by Mr. Diller to head up all of IAC's retailing operations -- including Cornerstone Brands, a group of catalogs -- in April 2006. A fashion fanatic who had never bought anything from HSN before working there, Ms. Grossman moved quickly to overhaul the channel's merchandise. Believing HSN viewers had been turned off by shoddy products that were out-of-date, she cut back the time devoted to old suppliers and brought in new brands, including Scoop NYC, a clothing company, and Sephora, a beauty retailer.
Ms. Grossman also overhauled the management team. She brought in a number of new executives, including a reality-TV expert from Los Angeles who brainstormed about creating new categories of programming, such as shows in which contestants would compete to find the next great product. She also instructed the hosts to try to entertain shoppers by discussing trends and to stop calling every product "the best."
At first some changes went too far, alienating customers who preferred more familiar items and formats. Ms. Grossman overestimated consumers' appetite for products like sleepwear and intimate apparel. And she loosened up the format so much that overly chatty hosts distracted attention from the products they were supposed to be selling.
Mr. Malone, in an interview last year, said he felt she had been too aggressive with a delicate business. "You don't go in and start turning dials in your Ferrari carburetor," he said. "You may never get it running."
Meanwhile, HSN's growth remained relatively stagnant, and profit continued to fall. But Ms. Grossman kept tinkering, and by the summer the network had started to find its rhythm. A month-long anniversary special showing off new backdrops and a new Web site helped drive the network's active-customer count up for the first time since 2005. During fall fashion week a few weeks later, higher-priced items like a suede-trimmed sleeveless shell sold out in about a minute.
In the third quarter, HSN's revenue rose 5% from a year earlier, followed by 8% gains in the fourth quarter announced last week (excluding results of the now-shuttered America's Store, a smaller sister channel of HSN). "HSN has definitely turned the corner," Mr. Diller said on the earnings call.
HSN has been at the center of possible deal-making many times before. In the days after IAC filed its first lawsuit against Liberty late last month, executives from both sides discussed a possible deal including the network, according to people familiar with the matter. Since then talks haven't resumed, but neither side has ruled out a settlement, according to these people.
A central role for HSN in IAC's future would bring things full circle for Messrs. Diller and Malone. Mr. Diller acquired HSN in 1995 from Liberty, shortly after Mr. Malone gave Mr. Diller the keys to a Liberty-controlled TV company that would over time evolve into IAC. Liberty kept a majority voting stake in the company but agreed to an arrangement under which Mr. Diller would have the right to vote Liberty's stake. The arrangement is seen as essentially unbreakable -- expiring only when Mr. Diller dies or leaves the company -- but Liberty is now trying to nullify the accord and seize control.
At the time, Mr. Malone thought Mr. Diller was the man to fix HSN's weak performance, tapping him in part because he had recently ended a successful stint at QVC.
Mr. Diller did manage to lift HSN's performance, generating enough cash from the TV channel to build IAC into a $13 billion empire (including travel site Expedia, carved off in 2005). But in 2005, fueled by high manager turnover and competition from the Web, HSN's growth started to stall, and by 2006 revenue was relatively flat. Mr. Diller has conceded the troubles were "self-inflicted," and he promised investors they could be fixed.
Mr. Diller tried a number of approaches to revive HSN, including selling its European operations and closing America's Store.
Even as HSN has begun to recover, growth at QVC -- which has long outperformed its smaller rival -- has stalled. QVC revenue rose just 2% in the third quarter to $1.7 billion. On an earnings call, Liberty Chief Executive Greg Maffei, who has played a key role in attempts to end Liberty's ties to Mr. Diller, bristled at the notion that HSN's performance was stronger because its revenue grew faster, instead citing heavy promotions and noting that QVC was still far more profitable.
Still, QVC faces challenges that could make a combination with HSN appealing. Not only is the general retail environment sluggish, but jewelry sales -- a mainstay of TV home shopping -- are under pressure as gold prices spike. In addition, competition from Internet retailers -- which are creeping into core TV-shopping categories like home furnishings -- continues to intensify.
HSN could help counteract such pressures by giving QVC some added leverage in negotiating distribution and merchandizing deals. Liberty has also discussed the potential to use different networks to target different audiences.
IAC and News Corp.'s Dow Jones & Co., publisher of the Wall Street Journal, together operate a personal-finance Web site.
