Barry Diller interview, Aug. 9, 2002
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COLVIN: All right. Last October you filed a one-page statement with the SEC. People are still talking about it. In fact, I think they're talking about it more than ever. What did you do?
DILLER: When we filed a statement about not doing guidance any longer? Yeah. What really happened is we were in one of these meetings you have before you put your numbers together. This was really for the budget for the following year. And we were looking at the endless number of columns and sheets and whatever.
And I said: "You know, I mean there are four columns here of different forms of guidance. There's so many numbers on this page. This is craziness."
First of all, who could ever track this and why should we continue to participate in what has become corrupt? The whole process of whispers and exceeding guidance consistently by a penny, or all of the manipulations, etc.
And I said to the group, I said, "Why don't we just not do it?" And they kind of all went, "Well, what do you mean not do it? Everybody does it and it's part of the circus. It's part of the process that now everybody is engaged in." And I said "Yes, but it's a bad process."
It forces you to do a whole series of things which are not, I mean they're not falsifying numbers, but they are absolutely various kinds of manipulations in order to keep faith with this guidance, because if you don't, the anvil over your head is going to really come down. Because if you miss it or the whispers go the other way or all of that, anyway I thought, I said, "Let's just stop it."
And then the thing was, well, what would we do instead? And we said, "Well, why not just publish our budget?" We have a budget for next year. That's our real budget. That's what we're, that's what we're organizing with our, all of our staff, that's what they're working against in terms of their own incentives. Let's just publish it and say this is our budget, and then each quarter all we'll do is say we're on budget for the year, we're ahead of it, or we're behind it, and we won't break anything else out. And so we did it, and now we've lived with it for I guess two reporting quarters, and it's the right thing to do. I'm shocked that more people...
COLVIN: Well, I want to get to that, why more people don't do it. But first I want to ask you how has it worked?
DILLER: Well, it's worked as it should work, which is that our budgets -- we believe that the budget process should be somewhat of a stretch, but attainable. We said if we're really running an honest game, what will happen is that some quarters we'll hit it, some we'll be behind, some we'll exceed it. And people who analyze us will be about 50 percent right and 50 percent wrong, which they should be for a company that's got, so to speak, optimistic growth and stretch in front of it. But that's healthy, and that's a good way for us to manage our business and it's a good way for people to look in on us. And so, so far it's worked great.
COLVIN: What did either the lawyers or other internal people say to you when you said, I want to publish our internal budget?
DILLER: Well, they said simply you just have to do what you say, and if you do that then the legal issues and the other issues -- As a matter of fact, the issues come when in fact you really do do guidance, because when you're doing guidance, it's different from your budget. It means you have your own budget, you have guidance, and you probably have one or two other little guidance columns. And so if you don't do any of that, then the transparency is just that much cleaner, and we have thought for a long time we like that. I mean I like that as a discipline. I like it for all sorts of obvious reasons.
I won't call it kind of God, country, motherhood and things like that, but I think that the more transparency you have, the simpler it is, the better it is. That's why we went to cash earnings before anybody else. It's why we said this whole apparatus should be pulled apart. It's why I think that it's another form of, in its -- let me say it correctly -- in its purity, EBITDA is, in its purity, an okay way to look at things, if in fact every time you say it, you then qualify it for exactly what it is, and what it is showing.
Otherwise what happens, and what happened over a long period of time, is, of course, it got corrupted, as almost everything did, as everybody was in on this kind of circular gravy train, from people who would buy a share, a single share or whatever -- small, small people who invested in the market -- to people who cashed in hundreds and hundreds of millions of dollars of options. It was the same, the same circle, and I think that, in fact, the real way to run your business is cash in and cash out. Everything else and all the accounting stuff and all the stuff that we've now, that are interpretations are essentially eventually misleading.
COLVIN: With all the focus today on credibility and honesty, trustworthiness in corporations, why don't more companies do what you have done? It seems simple, it seems advantageous, it seems clear.
DILLER: They will, they will. I mean I really do believe they will. Look, I'm also surprised at companies who (?) stock options. I mean it's very clear that...
COLVIN: And just to be clear, you have now decided that, you were saying a directive, will expense options.
DILLER: Absolutely. What we've really said is that we think that, again, this whole process, this whole, this is stuff that has been growing for more than ten years. You know, the original sensibility of options, particularly for companies that were start-ups, where in fact you got a band of a hundred or 500 people or, in the beginning a few people around, to start and build the business, to have all of the employees, or certainly the critical group, invested in building a business from the ground up. Before equity was really achieved or created, where in a sense there was no value. So I've always thought that was great.
You know, this company, USA (Networks), started essentially with $41 million in sales and a very small -- they had a market -- that's an interesting re-phrase of the word -- a market capitalization of, I think, $230 million. This is seven-plus years ago. And that was, I mean clearly it was, we were, it was an entrepreneurial bet, so to speak, what could be created. Now I think for the people engaged in that, to be highly invested in it is terrific.
COLVIN: Right.
DILLER: Before real equity has been created. But I think that once equity's been established, i.e. for second-, third-stage companies, I think options, the whole sense of every year deeding away one or two percent of the equity of the company is, is not fair to shareholders. So the idea though of expensing them, again I mean what we said is, we think really the thing to do is to get rid of options, because that makes more sense today. That in fact what you really should do to incentivize people who are part of your company and the people in the company who are going to -- again, once a company is developed, where the people who are really going to add value to the company -- you should give them stock, restricted stock.
COLVIN: Which means they are given the shares. The restriction is they can't sell them for X number of years, but then the restrictions come off.
DILLER: Well, actually what we believe is what's called cliff vesting, steep cliff vesting.
COLVIN: How does it work?
DILLER: Which means that you get a grant of a thousand shares, but if you are not with the company for let's say -- I think it should be five years, but in some cases you could argue maybe four or even three in some, depending upon if it's, if it's somewhat, let's say a contractually-organized thing -- that if you're with the company for five years, you get the shares. If they're a day less than that, you don't get anything.
So it's very steep, it's long term, and the design of it should be to say if you're going to stay here for a long time and be with this company, then in fact having you totally aligned with shareholders is a pretty good thing. And then what you can also do is you can say those number of units either increase or decrease based upon actual performance. So you can both align the shares -- sorry, align the interests of the people in your company with shareholders, while at the same time having incentives that either give more or take away, based upon individual performance, which is the whole point of the whole drill anyway.
What's happened over the years is the thing's gotten so bureaucratized where outside consultants come in with elaborate schemes and plans for thousands and thousands of people that have very little to do with actually incentivizing anyone, I think, so...
COLVIN: And there are no accounting issues with restricted stock. It's all handled...
DILLER: On restricted stock, they are expensed, so there are no accounting issues.
COLVIN: If a fellow CEO asked you about doing the things you've done, ending guidance, expensing options, and said he's worried about doing it, he's worried the analysts will beat him up, he's worried that all sorts of bad things will happen, what would you say?
DILLER: I'd say it's a needless worry. That, in fact, none of that stuff -- I mean, I've talked to several CEOs about this, who said, "Oh well, I don't think we can do it because of this..." And I said, "Oh, it's a lot of noise. Of course you can do it."
And once you do it, once you're freed from it, then in fact a whole set of extraneous stuff goes out of your life and you actually manage the business and you spend a lot less time with what I really do believe is a false game. And therefore, I just, I think the whole thing, again, I think that this is a healthy process. I mean, it's a rough process, but it's a healthy process.
And all of the things that are now happening are essentially good and sound for the underpinnings of this entire system. Because the excesses were beginning to spin, and as we saw clearly, out of control. Now I don't think that, I mean I think there are probably but a few people who acted fraudulently, but there were hundreds of thousands on the margins, and I think that is going to be over, and that's good.
COLVIN: You have a lot of experience with Wall Street and the analysts and all the players in that game. What if every publicly traded company did what you've done here? What would this whole system look like?
DILLER: Well, I just think that, again, it would be more transparent. I mean listen, I think that EBITDA should be actually killed. I think it should be, I mean outlawed, whatever, call it George. But I think that in fact, it should not exist because, not because, again, that once defined it's not simply a way of interpreting performance and numbers and stuff like that, but in fact because it has so many stretches in it and things that you can do because of it, it is essentially misleading, or can be misleading and has been misleading in lots of cases.
And so I think cash, what does the thing earn, as clearly as you can state it. If everybody did that, then I think that over time, confidence would return. But we're at the beginning of the end of this. We're not at the end. I wish we were, but we've got to go through much more process, because it's still, there are still people I think that are defending the current practices and past practices.
Nobody's defending fraudulent practices, but people are defending what I think is going to be indefensible. I just think the quicker you get there, the better it is. I mean, we still provide, by the way, we're now doing, and have been doing, cash earnings -- which we list -- and we also, several pages back, have EBITDA for those that want to follow it. That, I would think, within a relatively short period of time we won't be bothering with that. And I think more companies are going to do it and eventually will be eventually for lots, lots of...
COLVIN: Yeah, for lots of companies, yeah, yeah. There's a couple of other things. When you look at what happened at the great scandals, the big fraud cases of Enron and WorldCom, etc, etc, what do you think went wrong? What happened inside those companies that somehow permitted things to reach the horrible state they reached?
DILLER: Oh, well I think that you had crooks. I mean simple, I mean simple and clear. In these cases where you had people actually coming up with three plus, $3.8 billion of expenses and capitalized them, I mean that's just a crook. That's fraud. I mean what I've read, I don't know, you know, I don't know. If what you read is true, these are crooks. Now, there are always going to be some. I think, in the scheme of things, it's a handful.
What I do think is that this, is that this easy counting system of the last 10 years built up a climate where in fact, it was like literally saying, well, okay, here's this bank and you're a robber, and usually banks have guards and some protections and whatever and a cage and stuff, whatever. I think the system that we all kind of got comfortable with presented a bank with no guards, no cages, no anything.
So if you were a thief, oh my God, look at, look at how you could build it. And by the way, everybody facilitated it: in good and decent and honest accounting firms, and investment, and banks and all sorts of players and analysts and everyone else were corrupted into this process because of, first of all, the fact that there was no, there were no guards around; and second, because there was a crook around. So those, those were the ingredients of that.
Now I don't think what it tells us is about the system, is that years of this kind of easy counting or ways of manipulating the process, which began slowly but gathered steam and got fabric, when in fact you ended up with this concentration on quarterly results with all sorts, with the analyst culture, with all of these things that built up as these markets started to grow and the circle started to get more and more fed on each other. We're a condition of a series of events that in effect became kind of the, the, the ... the culture from which rotten people could take fraudulent advantage and good people would get corrupted to X or Y degree. So kind of long-winded, but...
COLVIN: No, no. That's fabulous. I've got to ask you about the media world.
DILLER: Sure.
COLVIN: Twelve months from now, which of the major media companies will be composed of the same pieces they're composed of today?
DILLER: I actually think probably, with the exception of Vivendi Universal, which is a special case -- there are obviously written-about reasons -- but I think that most of the others will probably be fairly intact, I think. I mean I don't think that the issue, (?) said that convergence is a failed concept, and that the marriage of old and new medias was a dead eye(?), is a dead eye(?).
I think that's true. I think it's a matter of execution. And I think that there is, of course, no question that all media is going to converge in a digital world, and that is going to happen. That means that there is a relationship, therefore, between all different types of media. So I think they'll probably remain more or less intact.
COLVIN: Barry, thank you.
DILLER: A pleasure.
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