Barry Diller's Breakup: Why IAC Didn't Work

Internet Company Was Too Complex, He Says; Smaller Firm Has Sharper Focus

Barry Diller's restless, 47-year business career is yet again taking a new turn. After a dizzying run from mailroom to studio mogul, he quit his high-flying Hollywood career 15 years ago to plunge into home-shopping television and the Internet.

Now, after years of defending his Internet conglomerate, IAC/InterActiveCorp, Mr. Diller broke apart the company six weeks ago, explaining it was too complicated and in too many diverse businesses. His remaining operations include the advertising-supported Web sites Ask.com and dating service Match.com.

The breakup means the 66-year-old Mr. Diller must prove himself anew. Mr. Diller's reputation has been dinged in recent years as IAC's market value withered. A dispute earlier this year with the company's majority shareholder, cable-TV mogul John Malone, over breakup terms was an unwelcome distraction.

In an interview, Mr. Diller talks about the new IAC, the effects of the bumpy financial climate and why he'd never return to running a major movie studio. Excerpts follow:

WSJ: Why did you decide to break up IAC?

Mr. Diller: Because I thought the company was overly complex and unmanageable. What I've learned over the years is that focus and singular purpose is the best approach for businesses. How can you function across 12 different businesses from financial services to dating?

If you're going to run a public company, be absolutely certain of what the parameters are, what the clarity is, that you can explain it to yourselves and explain it externally.
[Barry Diller] Justin Steele for The Wall Street Journal

"What I've learned over the years is that focus and singular purpose is the best approach for businesses," says Barry Diller. "How can you function across 12 different businesses from financial services to dating?"

WSJ: If, as you say, having operations across multiple businesses didn't work for IAC, why does it work for General Electric Co. or Walt Disney Co.?

Mr. Diller: Companies like GE and Procter & Gamble have been in business for a long time. Over decades or a century you're bound to figure out a management structure that works. Disney is a single brand in essence, but then you can say, wait a minute, what about ESPN? Tell me why ESPN belongs in Disney. I don't think it gives Disney anything. It gives Disney money, but I think that money is discounted. Its true value, I think Disney would say, is disguised.

I don't have answers for anybody else. What I know is that internal complexity makes for superficiality. There's never essentially a pure story unless there's a pure product line that has its own shining clarity.

WSJ: You have remade the company a few times now. Are you done? Will IAC in five years look the same as it does today?

Mr. Diller: I doubt it will look like what it looks like now, just because of the nature of what IAC is. We won't get out of the parameters we have set for ourselves, which is pure Internet whose drive wheel is this distribution and marketing machine. That to me is focused enough, and we may get even more focused as we go. We're sitting around here now saying we're going to dispose of some of our businesses.

WSJ: :What might you get rid of?

Mr. Diller: I'm not going to tell you since we haven't decided. But we're analyzing [the businesses] for potential size, the market they're in, should we bother with it.

WSJ: Does the credit crunch hurt your ability to sell assets?

Mr. Diller: The Internet area we're in is not really a sector that has had any current damage. But I can't predict that; if it freezes, it freezes.

WSJ: Companies have struggled to make money in online video and social networking. What is the outlook for advertising in these areas?

Mr. Diller: You really want to get a headache? Try to understand Internet advertising. Social networking advertising is being discounted because there is so much inventory [of available ad spots], and because methods have not yet been found to make it very effective. Will that get figured out? I absolutely believe it will. What form will it take? Absolutely unknown.

WSJ: Some investors were frustrated that IAC came out of the breakup with $1.3 billion in cash. What will you do with the money?

Mr. Diller: I think it's totally fair for people to say we have a company that is so overcapitalized. But we're not going to make acquisitions that are outside the parameters we have set: Internet, more than likely advertising-based, more than likely in our area of knowledge. Every mistake we've made in acquisitions has been outside our essential spheres of expertise. It's equally possible that as we focus more we will repatriate this cash in the next couple of years.

WSJ: Do the last three weeks of financial tumult make you feel differently about the capital structure of the company?

Mr. Diller: I'm happy about our position. We've operated very conservatively, and we've been criticized for it. Now we're in a position where -- not withstanding this current crisis -- we can continue to operate and invest in our business. Therefore I think over the next year or two we're going to be advantaged.

WSJ: : Liberty Media's John Malone had backed the creation of IAC, and he gave you his voting power over the company. Then Mr. Malone fought you -- and lost -- in court over terms of the breakup. Is the disagreement water under the bridge?

Mr. Diller: It is water down the drain. It's unfortunate that executives of Liberty forced us into this process that resulted in the court affirming our position, but they did. It was hurtful to the company in which they're investors, it was hurtful to me, it was a waste of time and money. It's over. It certainly has no effect because my relations with John Malone are right and proper. They can have board members, but I outvote them.

WSJ: IAC's stock performance has been lackluster in recent years. Why should investors stick by you now?

Mr. Diller: The truth is the market made judgments, and the recent judgments have been poor. There were legitimate reasons for that. Now, there are operating facts about this company that are irrefutable: It has revenue, it has earnings, it has a lot of cash and no debt.

WSJ: Would you want to run a movie company today?

Mr. Diller: No. Words like "tent pole" and "merchandising" have nothing to do with telling good stories. The current process of major film companies is so different than it was 10 or 20 years ago, and I find the output that comes from it far less interesting. It's a very hard business to get into, and I don't know why you'd make that choice rather than shoe manufacturing.

WSJ: Newspapers are suffering as advertising moves online. You are a director of Washington Post Co. Do you think newspaper companies will survive?

Mr. Diller: If they call themselves newspaper companies they are probably going to be toast. It will depend absolutely on what the product is. We're still at such an early period to talk about the death of journalism.

By: Shira Ovide
Wall Street Journal; October 7, 2008

Ask.com To Focus Strictly On Women

In an abrupt about-face, Ask.com is abandoning its poor efforts to compete with Google and in a move of sheer desperation will instead focus strictly on a singular demographic consisting only of married women looking for help managing their lives. After spending millions in TV advertising Ask continues to lose market share and has been unable to reach 1% of the keyword search marketplace.

The incredibly small and rapidly declining Ask.com is a money draining part of IAC/InterActive which also owns real estate site LendingTree, dating site Match.com, Ticketmaster.com and the Home Shopping Network and is led by Barry Diller.

Mr. Diller has consistently missed any mark in keyword search blowing millions of dollars in advertising and has backed up his ineffective advertising campaigns with critically poor decision making that has led to the rapid demise of the Ask brand.

Now after endless chaos and self destruction ask.com has decided that married women are their exclusive and sole ticket to financial rewards. As Google, Yahoo, and Microsoft battle for billions Ask has decided to leave the big leagues to target only married women?

First we will list the fuzzy details on this most mysterious business decision and then we will provide a few of the critical details on Barry Diller, a once proud broadcasting executive that has no idea how to manage a search engine and truly compete in today's keyword search marketplace.

Let's meet a doomed and confused Ask.com: As part of the new direction ask.com outlined, Ask also announced that they will lay off about 40 employees, or 8 percent of its work force.

With the shift, the Oakland, Calif.-based company will return to its roots by concentrating on finding answers to basic questions about recipes, hobbies, children’s homework, entertainment and health.

The decision to cater to married women primarily living in the southern and midwestern United States and comes after Ask spent years trying to build a better all-purpose search engine than Google.

The quest intensified after Internet conglomerate InterActiveCorp bought Ask and its affiliated Web sites for $2.3 billion in 2005. But Ask.com remained an also-ran, despite spending tens of millions of dollars on an advertising blitz about dozens of new products that impressed many industry analysts.

Through January of 2008, Ask ran the Internet’s fifth-largest search engine in the United States with a 4.5% market share, according to comScore Media Metrix. Google dominates the industry with a 58.5% share.

Jim Safka, who only became Ask’s chief executive in Jnauary 2008 predicted the retooling of the Ask brand will breathe new life into the search engine.

“Everyone at Ask is excited about our clear focus and the trajectory-changing results it will deliver,” he said in a statement.

Forrester Research analyst Charlene Li said Ask’s new strategy could help boost the company’s profits because married women — particularly mothers — dictate many household spending decisions, making them a prime advertising target. “It’s a smart move,” she said. “I still think Ask has great technology, but it’s just really hard to fight against Google.” (*** especially when you demonstrate absolutely no clue concerning keyword search as Ask has since Barry Diller took control. ***).

With Ask scaling back (*** big-time), the online search market could winnow to two dominant players, Google and Microsoft Corp. Now third in the market, Microsoft is trying to buy Yahoo Inc., which runs the second largest search engine, for about $40 billion.

Ask’s inability to increase its market share had spurred widespread speculation that Barry Diller, InterActiveCorp’s chief executive, might (*** sell out) and hire Google to run the search engine’s results to save money. Google already posts text-based ads on Ask and InterActiveCorp’s other Web sites in a five-year deal that Diller expects to generate about $3.5 billion.

New York-based InterActiveCorp plans to break itself into five separate companies later this year. Ask will remain under Diller’s control at InterActiveCorp.

When it started out in 1996, Ask positioned itself as a search engine that could spit out answers to requests that were posed as natural-language questions instead of being entered as a string of loosely related words.

But the search engine, then known as AskJeeves, frequently misinterpreted requests and produced nonsensical answers that triggered widespread ridicule.

After investing in more sophisticated technology, Ask tried to reposition itself as a cutting-edge alternative to Google and even dropped its cartoonish mascot — a genteel butler named Jeeves — in an effort to be taken more seriously.

Even after adding more bells and whistles, Ask still primarily appealed to women who used the search engine primarily to get simple answers including many related to Home Warranty. Women are also a familiar demographic for Safka, who was chief executive of InterActiveCorp’s online dating site, Match.com, before taking the reins at Ask.

Li predicted many married women and mothers will be thrilled to have a search engine focusing on their interests. “It’s not so much that these women have simple questions,” she said. “It’s just that they are so busy that they need fast answers.”

Let's examine Barry Diller and his mounting problems. John Malone Attempts to Oust Diller and Reward Shareholders. Liberty Media Corp. Interactive, the stock that tracks the performance of John Malone's QVC home- shopping unit, may gain as much as 15 percent from the Colorado billionaire's faceoff against Barry Diller in a Delaware court.

Malone heads to trial in early March 2008 to stop Diller's plan to break up IAC/InteractiveCorp. Some analysts expect a settlement that would let Malone swap his 30 percent stake in IAC for its Ticketmaster or HSN home-shopping units. Such a deal would be tax-free and could benefit Liberty Interactive, whose shares have fallen 22 percent this year.

Englewood, Colorado-based Liberty Interactive has been reviewing Barry Diller's performance for months. Recently Diller predicted last month he would succeed in court and split IAC into five parts by midyear. The breakup plan would stick Liberty Interactive shareholders with an estimated tax obligation of up to $450 million, payable as Diller unwinds his holdings in the spun-off companies.

Delaware Chancery Judge Stephen Lamb isn't likely to let the Diller breakup plan stand if Diller is found to have consciously added to John Malone's tax burden, said Charles Elson, who heads the University of Delaware's Center for Corporate Governance.

Barry Diller, 66, is chairman and chief executive officer of IAC. He controls 62 percent voting stake in IAC through a proxy agreement and has said he would exercise those rights in favor of the breakup. John Malone is trying to unseat Barry Diller at IAC and gain voting control of his stock.

As part of the arrangement, Diller who had headed four Liberty Media owned companies and held 48 percent voting stake in IAC. In that capacity, Barry Diller has an obligation to serve Liberty Media's best interests. ``For Barry Diller to vote those shares in a way that screws Liberty Media, and John Malone would be bad for all parties'' said a professor of corporate law at the University of Maryland.

Barry Diller's plan, announced in late 2007 is to split IAC into five companies. HSN and Ticketmaster, the world's largest ticket broker, would become independent, as would online-mortgage service LendingTree and time-share manager Interval International. Search engine Ask.com would remain with IAC.

The propsed deal violates many agreements between Liberty, IAC and Diller by eliminating John Malone's super-voting Class B stock at the spinoff companies, his lawyers have said in court papers. Liberty Media also contends that IAC directors violated duties to protect Liberty's financial interests.

John Malone, who recently turned 67 has declined to comment.

IAC in court papers denies any obligation to give Liberty Media extra voting rights at the spinoffs and says John Malone, who is on its board, initially backed the plan before learning that Liberty wouldn't get enhanced voting rights at the new companies. IAC spokeswoman Stacy Simpson declined to comment.

By pressing his case against Barry Diller, John Malone at a minimum may delay IAC's breakup plans. Malone still holds a slim chance to win control of IAC. Barry Diller acknowledged at a panel this week that he could lose.

HSN, QVC

Most likely there will be a settlement, with John Malone taking HSN in a tax-free swap for his stake in IAC. Talks over such an agreement broke down months ago as Barry Diller stopped participating.

Liberty Interactive is a tracking stock that reflects TV and online-shopping investments including QVC owned by Liberty Media Corp., John Malone's private holding company. Liberty Interactive has lost nearly 30% of its value in the last year. John Malone would like to merge HSN into his larger QVC. That would give Liberty Media a chance at increasing HSN's profit margins. Sales were little changed over the past year at $2.99 billion.

HSN Turnaround

``We'd want a few more quarters of improvement before we bought into that,'' said Lindsay, who predicts IAC shares will track peers and doesn't own them. He thinks the main reason Malone would accept HSN is to unload his IAC stake tax-free.

Malone's real target is Ticketmaster, though Diller doesn't want to sell, said analyst Matt Harrigan, an analyst at Ferris Baker Watts Inc. in Denver. Harrigan, who recommends Liberty Interactive and doesn't own the shares, said the case could lead to talks about Liberty's $1.55 billion stake in Bellevue, Washington-based Expedia Inc., the world's largest consumer travel agency. Diller is chairman of Expedia, which once was part of IAC.

``Malone is the master chess player,'' said Jordan Rohan, an analyst at RBC Capital Markets analyst in New York, who doesn't own IAC and has a market-perform recommendation. ``His real goal may be to get something else than HSN.''

Say Goodbye to Ask.com