Sale of Stations Signals End to Diller's Local Dream.

Five years ago, Barry Diller vowed to build a media company on the foundation of 12 television stations that aired home-shopping programs.

Through dozens of acquisitions and his own brand of alchemy, Diller turned the former Silver King Communications Inc., with 1995 revenue of $48 million, into USA Networks Inc., an entertainment and electronic-commerce company with 1999 revenue of $3.2 billion.

But Diller, chairman and chief executive of USA Networks, never managed to transform the TV station group, despite ambitious words and sporadic efforts. He recently announced the sale of the stations to Univision Communications Inc., the No. 1 U.S. Spanish language network, for $1.1 billion in cash.

Investors are cheered by the sale, which will put an end to the broadcast division's mounting losses. Cumulative operating losses exceeded $150 million over a four-year period.

Still, there are fans of the 58-year-old Diller that are sorry to see him quit the broadcast field, where he always cut a bold figure.

In his 20s, Diller was a wunderkind programming executive at ABC, who championed the network's decision to produce its own 90-minute "movies of the week," In his 40s, Diller again defied skeptics by building a successful "fourth" network, the Fox Broadcasting Co., for News Corp. He quit that company in 1992.

So expectations were high when Diller took control of the Silver King stations in 1995, From the outset, Diller said he wouldn't attempt to build another national network. Instead, he said he saw great potential in local programming, with sports, news and innovative shows. He called his prototype "CityVision," and garnered headlines when he converted his Miami station, WAMI-TV, to the format in June 1998.

Miami viewers were treated to quirky, irreverent programming that tried to capture a young audience. There was "Kenneth's Freakqency," a late-night South Beach talk show, and "Generation n," which featured stories keyed to second-generation Hispanic Americans. Initially, the station broadcast 87.5 hours of local programming a week, but that commitment was short-lived.

In January 1999, Diller said he had put on too much new programming at once. He scaled back local programming, began airing more reruns and slowed the rollout schedule for other stations.

Losses at stations

USA Networks cautioned investors that its planned conversion of four stations in 1999 might trigger operating losses of $90 million. Ultimately, the company converted just two stations, WHOT-TV in Atlanta and KSTR-TV in Dallas/Fort Worth, and held the divisional operating losses to $57 million in 1999.

This year, the pace slowed even more, with just one station, WHSH-TV in Boston, switching its format in August. The TV station group reported operating losses of $52 million for the nine months ended Sept. 30.

There were two reasons for Diller's slow pace: his fiscal caution, and the need to retain his Home Shopping Network audience after he acquired that network in 1996. The Silver King stations were airing the Home Shopping Network in important markets, where - thanks to federal rules - cable operators must retransmit local. TV signals. Before changing any station's format, Diller needed to negotiate with the local cable operator to carry the Home Shopping Network separately.

As the company noted in its 1999 annual report, cable operators might demand "upfront payments... which could be substantial." In Boston, for example, the, company had to lease an access channel for its Home Shopping programming.

In a telephone interview, Diller said the company has a schedule for shifting Home Shopping programming from all its TV stations onto cable within a year. "Home Shopping is completely protected," he said.

Diller said he has no regrets about abandoning his broadcast venture. "Maybe that's a rationalization, but the truth is, as lovely an idea as localism is, it's very difficult to execute," he said.

Diller said that as recently as 16 months ago, he was optimistic that a relaxation of ownership rules by the Federal Communications Commission might assure success because he would be allowed, under the "duopoly" rule, to pair his station with another station in most markets to reduce costs.

But the changed rule set off a wave of consolidation among big station groups, beginning with Viacom Inc.'s acquisition of CBS Corp. USA Networks never found a broadcast partner.

"Duopoly and consolidation, joined together, meant that any role we would have would be so junior as to be pointless," Diller said.

Shareholder conflicts

Diller doesn't accept "junior" roles. He left Fox in 1992 to become his own boss. Since then, success in broadcasting has eluded him.

Twice, Diller has tried to acquire control of a major network, only to be thwarted by one of his own shareholders with a conflicting agenda.

As chief executive of QVC Inc. in 1994, Diller announced a merger with CBS, only to be blocked by Comcast Corp., a big QVC shareholder. Comcast objected because federal cross-ownership rules would have forced it, as a cable-TV operator, to reduce its voting stake in the broadcast company to less than 5 percent.

At USA Networks, Diller was prevented from pursuing a combination with NBC in 1998 by Seagram Co., his largest shareholder. At the time, Seagram was said to be concerned about dilution of its stake, and issues of control.

The question of control might have also nixed a joint venture with Walt Disney Co.'s ABC network. The Hollywood Reporter reported talks between the two companies in January, and again last month. Many industry executives couldn't see how authority would be shared by Diller and Disney Chief Executive Michael Eisner, who was Diller's subordinate at Paramount Pictures for eight years.

In truth, USA Networks should reap a handsome profit from the sale of the stations. With relatively little investment, the stations appreciated mightily since 1995, when Diller took the helm of Silver King. At that time, Silver King's market capitalization was less than $250 million. Today, USA Networks' market capitalization is $13 billion. And Diller paid just $5 million for his controlling block of voting shares.

With or without TV stations, Diller does just fine.