The art of the Diller deal.

A simplified look at a complicated plan

It's cable. It's broadcast. It's national. It's local. It's Universal TV. It's the USA Network and the Sci-Fi Channel. It's Silver King. What is this confusing beast? It's the new USA Networks Inc., and even the most seasoned industry pro could be forgiven for feeling like one of the blind men groping his way around the elephant, trying to get a sense of the whole creature from the accumulated parts.

The agreement that created USA Networks Inc. was unveiled on October 20, 1997. The deal, which closed in February 1998, gave Barry Diller's HSN Inc. the U.S. TV production and distribution divisions of Universal Studios Inc.; domestic cable channels the USA Network and the Sci-Fi Channel; and 50 percent of the international operations of the USA Network and the Sci-Fi Channel. Universal - which retains all its movie and theme park business and 50 percent of the international operations of the USA Network and the Sci-Fi Channel as well as its TV library and its international TV divisions - profited to the tune of $4.075 billion, in the form of $1.2 billion in cash and a roughly 45 percent interest in HSN Inc. Because Universal's parent, The Seagram Company, is Canadian, foreign ownership rules prohibit it from acquiring large stakes in U.S. TV stations: thus the 45 percent is not in HSN itself but in a subsidiary that does not include HSN's 11 wholly owned and seven partly owned Silver King broadcast stations (now known as the USA Station Group).

For a fee, Universal will distribute internationally all new syndicated programming produced by Diller's newly named company, USA Networks Inc., while USA Networks will handle the domestic distribution of Universal's TV library for the next 15 years.

Diller joined the board of Seagram, and as long as he remains CEO of USA Networks Inc. he will have voting rights over Seagram's shares of the new company. If Diller dies or decides to sell the company, or after four years, Seagram can increase its holding to a majority stake, provided the FCC does not object.

Diller merged the Universal TV assets and the two cable networks with HSN Inc. (which includes, among other assets, the Silver King stations, the cable Home Shopping Network and a controlling interest in Ticketmaster), creating USA Networks Inc. Diller's goal is to form a new sort of network, a national-local broadcast-cable hybrid that will rely on cross-promotion to hopefully raise what have traditionally been low cable ad rates. Programming from the USA Network (which Diller helped launch as an executive at Paramount 18 years ago) will run on the Silver King broadcast stations at times carefully staggered so as not to simulcast with the cable network itself. The Silver King stations will be dominated by USA Network programming in primetime, but during daytime they will air roughly 10 hours of local programming a day. If Diller's local programming idea seems a little out of place in a plan that otherwise relies on agglomeration of assets and sheer size, that's because it predates the Universal-HSN deal. As early as September 1996, Diller was planning to revamp the Silver King stations, most of which are high on the dial and low on viewers, with a course of local programming titled CityVision. Diller, the man who tried and failed to buy CBS and Paramount, the man who launched the Fox network, was casting about for a way to build a new network, and in the absence of any larger assets to merge with the Silver King stations, he settled on localism as an answer.

However, even though Diller has managed to bag part of Universal, the local plan remains, tacked onto the larger strategy in a somewhat odd way. Since tile Universal-HSN deal in October, WYHS Miami, the station scheduled to debut the CityVision concept this June, has forged ahead, hiring new staff and developing new local shows.

Strangely enough, Silver King sold another of its wholly owned stations, WHSW Baltimore, to United TV for $80 million in November, saying that the funds would help implement the Miami CityVision launch. The official line is that Baltimore is not a top market and thus the station was not strategic to Diller's overall plan. Still, when the Silver King stations are supposedly such a fundamental pillar of the plan, intended to broaden the USA Network's reach from roughly 65 percent of the country to roughly 90 percent - and when some speculate that Universal consented to giving up partial control of its assets in order to obtain access to a station group - the sale of one of those stations a mere month after the announcement of the deal was an unusual move, if not a suggestive one.

One of the strengths of USA Networks Inc. is the involvement of cable giant TCI. Through its subsidiary Liberty Media, TCI owned roughly 30 percent of HSN Inc. The Universal-HSN deal decreased Liberty's share in USA Networks Inc. to roughly 16 percent, but Liberty has the right to increase its stake to 25 percent. Whatever the numbers, it's clear that the largest U.S. cable operator's (literal) interest in USA Networks could do wonders for USA's cable reach.

As with all things Diller, first came the deal, then came the speculation. Some theorized that the October deal was a stepping stone to the purchase of Universal itself, a company that (again, speculatively) parent Seagram might be wanting to dispense with, since Universal's stock performance has been inferior to that of DuPont, which Seagram sold back in April 1995 in order to buy Universal. Others looked at Diller, the man never without a plan, and wondered whether he might again be eyeing CBS. Diller has denied this, reportedly adding that he had enough business to do. One can certainly see his point: what with turning his national-local broadcast-cable Universal/USA Network/Sci-Fi Channel/HSN/Silver King hydra into one cohesive entity, the man is going to be busy.