Vivendi Deal Is Latest Glitch in Diller's Empire-Building.

Barry Diller, chairman and chief executive of USA Networks Inc., has acquired more than 20 businesses since 1995 in his quest to build a third-rate TV-station group into a media powerhouse. But with a total stock market value in the $17 billion range, Diller's company is dwarfed by competitors like Time Warner Inc. Viacom Inc. and Walt Disney Co. - all with market capitalizations exceeding $80 billion - and Rupert Murdoch's News Corp., valued in excess of $40 billion.

Even Seagram Co., Diller's largest shareholder, sought a larger partner of its own: on June 20, Seagram announced a merger agreement with Vivendi SA and Canal Plus that will, create a company with a market cap of $100 billion.

What are Diller's chances in this media galaxy? To some critics, USA Networks seems an odd mix of retailing and entertainment, with 55 percent of 1999 revenue generated by electronic commerce and 45 percent from entertainment. Diller, in his annual letter to shareholders, insists the businesses mesh: "We believe the company is in the perfect place to forge the convergency of entertainment, information and direct selling."

Size counts

But scale, rather than business mix, is the most pressing issue. What to do about USA Networks' lack of size led to a simmering conflict between Diller and Seagram, which owns 43 percent of USA Networks' shares and can veto any acquisition that exceeds 10 percent of USA Networks' market value. With its Seagram acquisition, Vivendi will acquire the same veto rights.

"The problems that we've had (with Seagram) have been a bit overstated, although they've provided certainly some irritation and frustration," Diller said in an interview in late May.

Diller insists that his company is not marginalized -- yet. But he is finding it harder to compete. USA Networks may lose its most popular cable TV programming - four wrestling entertainment shows, including "Raw Is War" - to Viacom. The larger rival offered the program supplier, World Wrestling Federation Entertainment Inc., an array of deals that USA Networks cannot match: book publishing, theme park attractions, radio, billboards and pay-per-view events in some Viacom-owned theaters.

Diller sued Viacom and WWFE in April in an effort to enforce USA Networks' rights to renew the televised shows in September. The Delaware Chancery Court recently ruled in Viacom's favor. The lawsuit was poignant evidence that Diller is fighting to preserve old turf while competitors expand.

Hard work

There may yet be room for a sixth giant in the entertainment and media world, but Diller is not assured of running. it. "There are two ways to get there. One is by acquisition, obviously, and the other is growth in the individual businesses, brick by brick," says Diller. "The latter is doable. It's very hard."

Seagram blocked Diller's effort to combine with NBC in 1998, according to news reports at the time, and grew anxious about its own future after the Viacom-CBS and Time Warner-AOL deals were announced. With a market capitalization in the $20 billion range before the Vivendi deal, Seagram did not rank as a "tier one" entertainment company, despite control of Universal Studios and a huge recorded-music business. So Seagram Chief Executive Edgar Bronfman Jr. began looking for a merger partner, even as he denied rumors of his search.

Diller has a seat on the Seagram board, but he was not privy to the early Vivendi negotiations. Nevertheless, he was buoyed by the prospect of a different media company acquiring the Seagram stake when he was interviewed a month prior to the Vivendi-Universal deal.

"I've thought about that, obviously, given all the rumors," he said. "If it's anybody in the world that' s close to media, I can't see it being a problem for us. I can only see it being an opportunity."

It was a rare admission of Diller's strained relationship with Seagram. In press conferences, Diller had rebuffed questions about Seagram. Nor has he divulged details of the negotiations with NBC in 1998. But during the May interview in his Los Angeles office overlooking Sunset Boulevard, Diller acknowledged the conflict that proposed acquisitions raised with his dominant shareholder.

But Duller got friendly signals from Vivendi Chief Executive Jean-Marie Messier, a former investment banker. On the eve of the merger announcement, for instance, Messier told the Hollywood Reporter trade publication that he expected to meet Diller "soon, with an aggressively dynamic view of what we can do together. He is a great man. I'm ready to hear his projects and see how we can best support them."

Almost certainly there will be a honeymoon period with Vivendi, because Diller can open many doors. Hollywood is run, in large measure, by executives who worked under Duller at Paramount or Fox, and who respect him.

Small stall

In recent months, Diller has made a string of small investments and acquisitions totaling less than $1 billion. In May, he announced the acquisition of two small cable TV channels (Trio Networks and News World International) for $100 million; the company also, is completing the acquisition of Styleclick.com, which provides the fashion industry with software and operates a fashion e-commerce Web site, likening itself to a shopping mall operator.

However laudable, the small deals puzzle or disappoint a portion of the Diller audience that has grown to expect a "transforming" deal nearly every year since 1992, the year he walked away from his studio job after building Fox into the fourth network.

Diller now spends about one week a month in the Los Angeles area - without an entourage. He usually drives alone to Pasadena for a monthly meeting with Ticketmaster Online-CitySearch executives, says Charles Conn, the subsidiary's chairman.

When possible, Diller says, he still joins a Hollywood poker game frequented by Johnny Carson, Carl Reiner, Steve Martin and Neil Simon. "It still goes on; it's a great tradition." Diller concedes that he sometimes stays in a hand longer than he should, hoping to buy a card.

The same has been said about Diller's willingness to stick by some executives and some ventures too long. "True," he says. "Absolutely true. I hope I continue to do that. I hope the one thing that does not happen to me is that I get cynical. So long as I don't make the big mistake, I'll be OK."