TCS Daily


The Hyperactive Corporation

By Dominic Basulto - July 7, 2003 12:00 AM

On the surface, USA Interactive (recently re-named InterActiveCorp) and AOL Time Warner appear to be corporate twins separated at birth. Both are Internet era conglomerates, both played up the "convergence story" on a madcap e-commerce acquisition binge and both are desperately after the Internet stock multiples afforded to high-fliers such as Yahoo, Amazon and eBay. Even the names of the two companies are strangely similar. (USA Online? America Interactive?) Yet, as InterActiveCorp (IAC) has recently demonstrated, there is a world of difference between an "interactive" company and an "online" company. So why has AOL Time Warner flopped and IAC emerged as the new darling of the Internet sector?

Perhaps the best evidence comes from the three-page letter that InterActive Corp CEO Barry Diller sent to shareholders in early May. In it, Diller enunciates his grand vision for the company as the worldwide leader "in the business of interactivity via the Internet, the TV and the telephone." Having already demonstrated his prowess as a media mogul, Diller has now put together an e-commerce empire par excellence. He has simplified and streamlined the company, assembling his e-commerce cash cows into three major categories: E-Retailing (HSN, America's Store, HSN.com), Information & Services (Ticketmaster, Match.com, Citysearch, Evite) and Travel Services (Expedia, Hotels.com, TV Travel Group). In short, he has transformed IAC from a holding company into an operating company.

Similar to AOL Time Warner, the IAC story is a convergence story. But it is not the convergence of Online and Offline properties, or the convergence of New Media and Old Media assets, or even the convergence of Digital assets with Analog assets. It is, in the words of Diller, "a convergence of entertainment with information and direct selling." Entertainment or information or direct selling assets do not create value alone -- they must be combined and mixed together. Moreover, consumers must be allowed to enter an "unwalled garden" of discounts, memberships and cross-brand promotions. Slapping together an hour of entertainment for the masses means nothing if there's not an opportunity to sell something. In this regard, Diller is almost agnostic whether these assets are Online or Offline -- for now, the economies of scale possible via the Web and the cost-effectiveness of Internet operations argues for a significant online presence -- yet he emphasizes that interactivity can occur via the telephone and the TV.

Moreover, Diller argues that the #1 metric for judging the success of his e-commerce properties should be "free cash flow," and not something like EBITDA, revenue, subscriptions, market share, or heaven forbid, "eyeballs." Ask any accountant (especially a former employee at WorldCom or Enron) -- revenue and cash flow are not the same. A company that throws off cash deserves a higher multiple: in theory, Wall Street values companies on the basis of "discounted cash flows" -- the more cash, the higher the value. In 2002, the companies comprising IAC threw off $545 million in free cash flow. In 1Q 2003, IAC generated $406 million in free cash flow. Moreover, revenue increased by 38%, to $1.4 billion. EBITDA was up 120%. Operating income was up 236%. Those are some impressive numbers.

Finally, Diller has placed his bet on "transactions," and not on "content." Content is not king, transactions are. Diller makes this clear in a March 2003 interview with Wired magazine: "When you talk about content, what you're really talking about are goods and services... the selling of goods or the dissemination of services." Content, in Diller's opinion, is only useful when it is bundled with a transaction. Sure, there are plans to create a "USA Travel Channel" -- but the channel is only a feeder for the company's travel services offerings. Show an hour-special about world-class hotels, and then send the viewer to Hotels.com to book a nice stay. It's all part of a plan to create "interactive commerce verticals."

In fact, Diller has systematically shed any content or media properties that do not fit his definition of an "interactive transaction company." In May 2002, Diller unlocked additional shareholder value by contributing the assets of USA Entertainment to the Vivendi Universal Entertainment (VUE) entity. This strategy is reflected in the name of the company, which has morphed from USA Networks to USA Interactive to InterActiveCorp.

Maybe it is too early to tell if Barry Diller's vision of interactivity will pay off for shareholders. Since February, though, shares of the company have skyrocketed, from just over $20 to nearly $40 a share. For now, Diller has put the Internet world on notice: his competitors are not media giants or entertainment giants -- his new rivals are companies like eBay, Amazon and Yahoo. Diller likes to call them "Tier 1 Interactive Companies." Who knows? Given Diller's penchant for changing names, acquiring new companies, generating cash and creating value for shareholders, the company may soon be known as the HyperActive Corporation.
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