Is Regulation Ahead For Giants of Tech? -- WSJ

By the way, I think that the pressure of venture capital to force companies to go public because they've got to return money to shareholders isn't a very good process. Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 24, 2017).

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Barry Diller says it's inevitable. Also: He talks about the absurd valuations put on 'unicorns.'

Barry Diller, after a long and successful career in traditional entertainment, has reinvented himself as chairman of IAC/InterActiveCorp, owner of such popular digital properties as Angie's List and Expedia.

Wall Street Journal Editor in Chief Gerard Baker spoke with Mr. Diller about the fierce competition and harsh realities in today's digital business world. Edited excerpts follow.

MR. BAKER: You've created tremendous value for shareholders by acquiring or developing internet businesses and then spinning them off. Tell us how that model works.

MR. DILLER: How it happened originally was we owned Ticketmaster, and one day the guy who ran Ticketmaster came in and said he would like to make a greater investment the next year. And therefore, he would take his earnings way down. And he said, "So can I do it?"

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And I said, "So you're, like, coming to Daddy to ask? You're in a false environment." It occurred to me that companies, once they got up to being a substantial business, should not rely on a corporate for capital or for telling them what's right or wrong.

So we started spitting these companies out. I believe that companies that have multiple and disparate operating divisions are really suboptimal.

MR. BAKER: What was the threshold at which you --

MR. DILLER: There is none.

MR. BAKER: There is none?

MR. DILLER: No. It's feel. Every one worked better when they were independent. If you really want a company to continue to innovate, they've got to be on their own melting ice cube.

MR. BAKER: What do you think of the virtues of going public versus going private? You've spun off a lot of companies that are now public.

MR. DILLER: They're all public.

MR. BAKER: But they are confronting all of those challenges public companies face: tougher regulation and scrutiny and reporting requirements. What would your advice be to an Uber or an Airbnb as they go through this process?

MR. DILLER: If you don't have to, don't do it. Meaning the reason that you would take a company public is liquidity, for all the obvious reasons. However, unless you need capital, there's utterly no purpose so long as you can provide some liquidity to people who need it. I've never sold a share of my company.

MR. BAKER: These valuations for so-called unicorns, do you think that the aura of being a tech company somehow bestows on them some kind of magical valuation?

MR. DILLER: Well, yeah. A company isn't dealing with basics when VCs in a room with three or four people make up a valuation when they do additional rounds of financing. It has no reality. It's just a bunch of guys saying, "Oh, we were worth $300 million. Oh, let's make it $700 million." And if they get enough people to buy it, "Let's make it $5 billion." Or in Uber's extreme case, "Let's make it $65 billion."

MR. BAKER: How do we do that? Can you give us a clue?

MR. DILLER: Let me tell you, it's very easy. You and I sit in a room and say, "We're going to get this dope over here to put some money in. Let's just make up a good figure and if he's going to buy it, fine with us." These valuations don't bear reality.

MR. BAKER: Being dependent on advertising in the current environment, unless your name is Google or Facebook, is pretty challenging, right?

MR. DILLER: There's no hope.

MR. BAKER: No hope?

MR. DILLER: If you're going to build a business based upon advertising, purely advertising is your sole source of revenue, I would say go home.

MR. BAKER: Really?

MR. DILLER: It isn't possible. There's no pricing power. You have two monopolists. One, really. Google is the true monopolist in terms of advertising. No one is going to enter it and take share away from that. It's just not possible. Not that there won't be other forms of advertising channels.

MR. BAKER: So you don't think anything can be done about the duopoly or the monopoly as you call it?

MR. DILLER: Eventually.

MR. BAKER: You think regulators are going to tackle it?

MR. DILLER: As we now see these companies, these four or five, having more hegemony over more areas, inevitably, it has to bring regulation. The track is so clear. This is a different situation than the standard fear that down the street, in a garage somewhere, will be your competitor that will destroy you. These main tracks have been laid now. And the dominant companies in them do not really have fundamental competition.

MR. BAKER: What about video?

MR. DILLER: Everybody and their mother is trying to do video. Mostly, defensively. Two companies are doing it offensively, Netflix and Amazon, interestingly, with two different business models. The Netflix model is very clear. They have 100 million subscribers. Their next closest competitor has 35 million or 40 million. They are so far ahead of everyone else, it's impossible at a mass communication scale to compete with them. And it's unlikely they're going to lose it, because they're overprogramming way beyond the water line.

The other model, which is completely weird if you're in the program business, or entertainment, is Amazon, because Amazon isn't particularly in the business of saying, "We'd like you to like our programming for its sake." Meaning, to the degree that people watch it, you do well. Amazon is doing it to build Prime, because they want to sell you more things. That's a business model entertainment has never had to compete with.

From the beginning of time, incumbents never invent anything new. Incumbents protect their ground. Other people come in with new ideas. And up until the last couple of years, the methodology was that HBO would be created by Time Inc., a publisher, and would eventually be bought.

Guess what? They are not buying Amazon and they're not buying Netflix.

Write to reports@wsj.com

(END) Dow Jones Newswires

October 24, 2017 02:47 ET (06:47 GMT)